Every investor understands there’s risk in real estate. The most successful investors understand how to appropriately assess that risk before moving forward on purchases that might otherwise end in regret.
ARV, or after-repair value, is one of the most popular ways for real estate investors to analyze the potential value of a property to determine if it makes sense in their portfolio. Calculating this value with accuracy relies on several fluctuating values, so it’s essential to decide on ARV with a complete understanding of its complexities.
Do you want to know more about successfully using ARV in real estate investing and planning? Read along in today’s guide to grasp ARV and what it really means for your business decisions.
A Table Of Contents On ARV In Real Estate
Tracking ARV is an invaluable tool for investors in the real estate market, but what exactly does this number tell you? Learn how to calculate and utilize ARV in real estate today effectively:
- What Is ARV In Real Estate?
- Guide: How To Calculate ARV
- What Is ARV Good For In Rental Investing?
- When Not To Prioritize ARV
- FAQs On ARV In Real Estate
- ARV: A Risk-Assessment Prediction
What Is ARV In Real Estate?
ARV stands for after-repair value. ARV represents the predicted value of a property once repairs are completed to lift it from its current condition. This number is frequently used by real estate investors when flipping properties to determine if a fixer-upper is worth the investment costs.
Beyond house flippers, other investors use the number as a way to gauge the worthiness of a property at holding value with the repairs needed to get the property into rentable condition. The repairs required can vary from simple appliance replacements to complete renovations; ARV can factor in them all.
The primary goal of ARV is to get a simplified look at whether or not the current price of a property that needs work is low enough to warrant the investment considering the cost of repairs. Ultimately, the goal of investing is profit and building long-term value, so it’s important to understand whether a property fits your investment portfolio.
Guide: How To Calculate ARV
Now that you know what ARV is in real estate, let’s take a closer look at how to calculate it. You can always utilize an online calculator to determine ARV, but it’s also important to understand what numbers are used in this calculation and why they are used.
Here’s the ARV formula used by most investors:
ARV = current property value + value of added renovations
That’s it! With this simple calculation, you can understand a property’s value if you do the necessary renovations. For example, a property worth $100,000 that could see an additional $60,000 in repair value would have an ARV of $160,000.
The actual formula for ARV is straightforward; the more challenging part of determining ARV is knowing how to value renovations since there isn’t a clear-cut number to input. There are a few essential steps to work through before and after calculating ARV to ensure the number is as accurate and functional as possible.
Step #1: Check All Comparables
Evaluating similar properties that have sold recently can help to give you a realistic idea of the property’s current and potential value. If you can access an MLS, you’ll have many tools for finding this information. Ideally, you’ll find at least three properties that are good comparisons when calculating ARV in real estate.
Otherwise, it’s a great idea to work with a local real estate agent to give you an idea of comps in your area that match well with the investment property in question.
When choosing comparable properties, ensure you are looking at the right kind of properties. All comps should fit the following categories:
- Similar square footage
- Similar style
- Similar age
- Similar conditions (i.e., don’t choose a fully renovated property when comparing to an unrenovated property)
- Same locale or neighborhood
If your comparables aren’t suitable matches, your ARV may be skewed from reality. Finding good comps can be tricky, so you may need to adjust and estimate a bit to find the correct comparable values for your property.
Step #2: Get A Solid Appraisal
As you know, the current value of your property is not the same as its listed cost. Having a complete appraisal done on a property is the best way to assess its current value. Without an appraisal, you’re working with limited information.
Ensure you work with a well-accredited appraiser in your area. Local experience and thoroughness will get you the most accurate appraisal possible, and this is what you want when you’ll be using the number to calculate ARV.
Step #3: Realistically Assess Repair Value
The best rental property upgrades simultaneously add function and value to your home. However, most properties will also need essential repairs that don’t add much intrinsic value. These can be costly but don’t necessarily see a great return on that investment.
This is part of why ensuring you assess the value of repairs clearly is so important. Repair cost and repair value aren’t the same. Unexpected expenses crop up during renovations and repairs, and ARV should be recalculated when this happens.
Utilize comparable properties and expert opinions on the value of specific repairs. Be strict in evaluating potential returns; it’s better to underestimate your profits than to be left high and dry.
What Is ARV Good For In Rental Investing?
Despite its limitations, ARV is a significant number to use when investing in real estate. It’s a parameter that should factor into your decision rather than a number that can be used to make decisions independently.
ARV identifies properties listed at a discounted price for good potential profit. It’s also good for securing the funds needed for repair. Some repair loans offer up to 65% of predicted ARV to cover the cost of renovations, and these loans provide capital to complete the process.
Investors flipping houses typically use the 70% rule to determine whether or not the investment price makes sense. This is the 70% ARV formula:
- (ARV x 70%) – estimated repair costs = maximum purchase price
By using this 70% formula, investors can ensure they leave enough room for profit after purchase. This formula won’t work for every market, but you can adjust it to suit yours by increasing or decreasing the percentage in the formula as you get familiar with what makes sense in your area.
When Not To Prioritize ARV
Buying your first rental property or investment property is a stressful time. It can feel like you need to use dozens of formulas, and ARV is just one of them. It’s important to remember that not every formula works in every situation.
ARV is only sometimes a logical choice to evaluate investment decisions. Let’s run through a few scenarios where ARV isn’t the best analytic tool.
Swift Market Changes
Every real estate market is constantly changing. Sometimes those changes can be predicted and accounted for as they happen steadily. At other times, the changes are unpredictable and rapid.
Market changes heavily impact the value of your property. Paying attention to local markets is vital. If swift market changes happen in your area, ARV loses its usefulness. Recalculating ARV frequently can help you assess these changes as they occur, but this is part of why ARV should never be your sole evaluation method.
Long Renovation Periods
If you’re investing in a property that needs to go through many renovations, your ARV will change during this process. That simple fact is due to inevitable changes in the real estate market during an extended period.
An eight-month renovation, for example, will enter a very different market once all repairs and upgrades are completed.
Repair Cost Adjustments
Unexpected costs are sure to spring up during the repair process. Additionally, your repair costs may differ from the original estimates due to changes in supply costs. National supply costs have been unstable for some time, and repair costs will fluctuate according to these changes. If changes happen rapidly, ARV may no longer be a good number for investing assessments.
Filling Rentals In New Investment Properties
While most investors utilizing ARV are focused on flipping properties for profit, ARV also has value in setting up new rental properties. Once you identify properties with good value and get them ready for renting, you’ll need to find great tenants.
That’s where RentPrep comes in to make your job easier. Tenant selection is a difficult process; landlords already have a lot to do without also needing to review dozens of applications. RentPrep’s screening packages offer various easy options for straightforward tenant application review and analysis. Check out what’s available for you right now.
FAQs On ARV In Real Estate
There’s always more information to explore regarding real estate investing. Here are the answers to the most commonly asked questions about ARV.
What is a good ARV in real estate?
Since ARV is an estimated property value, there isn’t a specific ARV that fits every scenario. Rather than using ARV as a benchmark to meet, investors use ARV to determine how much they are willing to spend on an investment property.
Every investor has a different maximum purchase price formula, and most of these formulas rely on ARV. For example, investors will say they will pay up to 80% of the ARV, minus any repair costs, for a property. This gives them enough room for profit without presenting too much unnecessary risk.
Consider the amount of risk you are comfortable with as your work ARV into your investment calculations.
What is the 70% rule in real estate investing?
Many investors use the 70% rule to determine the maximum purchase price for an investment property. This rule limits risk by only paying up to 70% of the ARV for the property, minus any repair costs.
Any offer lower than this amount will be difficult to secure due to the discounted offer; anything higher will present a risk of little to no profit. 70% has proven to be a solid percentage to work.
Properties that have been well-maintained are easier to profit from. With this property type, many investors will go as high as 75-80% when calculating their maximum purchase price. Properties that need fewer repairs still have the potential for good returns even at these higher percentages.
Is appraised value the same as ARV?
No. Appraised value and ARV represent two different values, though they are somehow linked.
ARV stands for after-repair value. After-repair value is calculated by adding together the home’s current value plus the estimated value of any repairs that will be completed. This gives investors an idea of a property’s potential and allows them to make sound investment decisions.
ARV is based on appraised value. The appraised value is a number an appraiser gives after thoroughly examining and evaluating a property. The appraiser suggests what the property is worth based on market conditions, property conditions, and several other factors.
Can you use ARV to get a loan?
ARV is used to secure some types of repair loans. Investors use these loans to cover the cost of flipping a property and they’re utilized for home repairs.
Some homeowners also use ARV calculations to obtain loans for renovating their homes. Banks and loan providers usually only give up to 65% of the ARV for these renovation loans.
ARV: A Risk-Assessment Prediction
Ultimately, you can utilize ARV, also known as after-repair value, to assess a property’s potential risks and rewards. With comparables and repair costs factored into ARV, the number gives you a point of reference for your profits if you move forward with an investment property.
Always remember the following when working with ARV:
- Home values are constantly changing; ARV isn’t an exact prediction of these changes
- Fluctuations in product cost can drastically change the cost of repairs
- ARV shouldn’t be the only number used to make your investment decisions
Undoubtedly, ARV is a valuable tool that can be included in your toolbox for analyzing potential investments. Now that you know exactly how this number is calculated and what it truly represents, make the most of ARV as you make future business decisions.