If you are prepared to get to work as a single-family rental home investor in Granbury, one of the many necessary terms you first need to know is After Repair Value (ARV). The after-repair value of a property refers to the value of a property that has been fixed up or renovated. More particularly, ARV refers to the estimated future value of the property, including all the repairs and improvements. To determine your property’s ARV and use it correctly, you must first know how to calculate it accurately. Keep reading to learn how to do so.
Start With a Market Analysis
A competitive market analysis is among the best methods to calculate your property’s ARV. By examining comparable properties (comps) that have recently sold, you can gain some insight into your property’s new market value. A lot of investors kick off by searching the multiple listing service (MLS) for recently sold properties that are as similar to your new, improved rental house as possible. For instance, you would want to find comps close to your property in age, size, location, construction method and style, and condition. In particular, seek at least three recently sold comps (i.e., sold within the last 90 days) that describe recent upgrades or improvements.
When you’ve already found three or more decent comps, you can then calculate your property’s after-repair value (ARV). There are two standard methods:
- Find the average sales price of comparable properties. For example, if you found three good comps, add their sold prices together, divide by three, and then you would have the average price. This number is your property after-repair value (ARV), which should be used to estimate the likely sales price of your own single-family rental house after improvements and repairs.
- Find the average price per square foot of your comparable properties. 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. This method can be more precise than the first option but requires a few extra steps.
Using Your ARV
As soon as you know your property’s ARV, you can use it in several ways. First, it can help you to set a more accurate rental rate. By understanding how your newly renovated property compares to others in the neighborhood, you can maximize your rental home’s potential. Another way that investors often use after-repair value is when buying investment properties.
When acquiring a new Granbury investment property, you may want to take 70% of the property’s after-repair value and subtract the costs of repairs and improvements. The resulting offer price can help you know where to start bidding for a property. In some cases, investors may go as high as 80% ARV, significantly increasing the chance of an acceptable offer. Of course, 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. While many investors learn to do so on their own, it can be helpful to rely on the expertise of a real estate professional or property management expert. Either one can help you locate comparable properties and 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? Contact Real Property Management Trailhead and request a rental market analysis to ensure you stay competitive. Call us at 817-930-1160 to speak with a Granbury property manager today.
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