Understanding ARV is critical for real estate investors to determine whether or not a property is a wise investment. We will discuss what goes into calculating ARV and how it can impact your bottom line.
What is After Repair Value?
After Repair Value (ARV) is the estimated future value of a property after it has been repaired and updated. For rehabbers and flippers, ARV is used to help determine whether or not a property is worth the investment.
Why Knowing the Potential After Repair Value Important?
There are a few reasons why knowing the ARV of an investment property is so important. First and foremost, it will give you a clear idea of how much money you’ll need to put into repairs and renovations to reach your desired profit margin. Without this information, it’s easy to overspend on improvements and end up in the red.
Calculating ARV (After-Repair-Value)
Several factors go into calculating ARV, including the property’s current condition, the cost of repairs, the location of the property, recent comparable sales in the area, and more. While there is no surefire way to estimate ARV with 100% accuracy, experienced real estate investors have developed methods for coming up with accurate estimates.
3 Common Ways To Calculate the ARV of an Investment Property
The three most common methods used to calculate the ARV of an investment property are ThePercent Method, The Cost Approach, and The Sales Comparison Approach. We will go over each method in detail below.
The Percent Method
With the percent method, you multiply the estimated repair costs by a certain percentage. The percentage you use will depend on the property type and location. For example, if you are calculating the ARV of a single-family home in a small town, you might use a percentage of 50%. Your formula would be: Estimated Repair Costs x 50% = ARV.
The Cost Approach
With the cost approach, you add up the cost of all materials and labor required to rebuild the property altogether. That includes the cost of land and any permits that would be required. Once you have your total rebuilding cost, you add it to the estimated market value of the land. That gives you your estimated ARV for the property. For example, if you’re buying a fix and flip the property for $90,000, you’ll need to know what the property will be worth after repairs to make a profit. Let’s say the estimated ARV of the property is $200,000. That means you have $110,000 in potential equity before repairs. Remember that this method is only sometimes accurate because it does not consider any appreciation or depreciation during rehab.
The Sales Comparison Approach
The sales comparison approach is the most common method real estate investors use when calculating the ARV of an investment property. With this method, you compare your subject property to similar properties recently sold in the same area. Use the sales price of these comparable properties to estimate the value of your subject property.
Why is After Repair Value Important?
ARV is essential for real estate investors because it impacts your bottom line. To make a wise real estate investment, you must understand the profit potential and risks. Levere our Deal Profitability Calculator to get the numbers.After-repair value is a critical concept for real estate investors to understand. By taking the time to learn how to calculate ARV accurately, you can increase your chances of making profitable investments in the future.
Conventional mortgage lenders offer loans based on the current value of the property. For the ARV loans investor need, that’s where DFW Investor Lending comes in. As a hard money lender, we offer fast and flexible financing on properties that need repairs or renovation. Whether you’re flipping homes or investing in rental properties in Dallas-Fort Worth, our loans can help you get the funding you need to make your dreams a reality. So if you’re looking for an alternative to conventional mortgages, contact us today, and let’s discuss your options!