If you are getting ready to start as a single-family rental home investor in Harrisonville, After Repair Value (ARV) is one of the first terms you need to be familiar with. A property’s after repair value is the value of a property that has been fixed up or renovated. More specifically, ARV refers to the estimated future value of the property, including all of the repairs and improvements. To figure out your property’s ARV and use it correctly, you will first need to know how to calculate it accurately.
You can do a competitive market analysis. This is one of the best ways that you can calculate your property’s after repair value. Check out recently sold comparable properties (comps). That will give you a good idea of what your property’s new market value will be. Most investors begin by looking for properties similar to your new, improved rental house that has been sold recently. They do this by searching the multiple listing service (MLS). Keep an eye out for comps that are very similar to your property in age, size, location, construction method and style, and condition. At least three recently sold comps (i.e., sold within the last 90 days) that detail recent upgrades or improvements would be a good number.
After you have found three or more decent comps, calculate your property’s after repair value. A way to do this is to find the average sales price of the properties you found. For example, if you found three good comps, add their sold prices together, then divide by three, you would have the average price. This figure would be your property’s after repair value (ARV), a number that should be used to estimate the likely sales price of your own single-family rental house after improvements and repairs.
You can also figure out the average price per square foot of your comparable properties. This is another way of calculating your property’s after repair value. This is how you do it: divide the total sales price by the average square footage of your comps. With an average price per square foot, you can then multiply that price by the number of square feet in your rental property. Although it requires a few extra steps, this method may a bit more precise than the first option.
Once you know your property’s ARV, you can use it in several ways. If you want to set a more accurate rental rate, knowing your ARV can help you. When you see how your recently renovated property compares to others in the neighborhood, you can take steps to maximize your rental home’s potential. Other investors usually use after repair value when buying investment properties.
Take 70% of the property’s after repair value and subtract the cost of repairs when you purchase a new investment property. This will give you the offer price, which helps know where to start bidding for a property. In some cases, investors may go as high as 80% ARV, which significantly increases the chance of an acceptable offer. Remember, the higher the ARV you use to determine your offer price, the higher the risk for your profit margins afterward.
Calculating an accurate after repair value takes practice and skill. Though many investors learn to do so on their own, others seek the assistance of a real estate professional or property management expert. Either of them can help you locate comparable properties as well as ensure that your calculations reflect the true nature of the property, its location, and its future potential as a rental house.
Have you recently completed renovations on your investment property?
Give Real Property Management Consultants a call to get a FREE rental market analysis. We’ll help you stay competitive. Call us at 816-207-0750 to speak with a Harrisonville property manager today.
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