What is after repair value (ARV) and how do real estate investors use it to make smart decisions?
That’s what we’re talking about here.
We’ll explain what ARV is and why it’s important (critical, even) to understand.
We’ll even show you how to calculate ARV for every type of business model (with real-world examples).
Let’s dive in.
What is After Repair Value (ARV)?
After repair value (ARV) is a term real estate investors use to refer to the expected market value of a property after it’s been repaired.
That’s our official definition.
But what does that actually mean?
Well, imagine that you flip houses for a living — you buy distressed properties at a discount, fix them up, and then sell them on the MLS for a profit.
Obviously, it’s a numbers game.
If you can’t calculate the ARV of the properties you’re purchasing (i.e. what you can sell the properties for after you’ve repaired them), then you also won’t know how much to pay for them or even how much you should spend on repairs.
That’s why ARV is a critical metric for real estate investors.
Good deals hinge on good math. And ARV is one of the most important numbers to know.
So how do you calculate ARV?
There’s actually a lot that goes into it — and it can be a big learning curve — but for the sake of simplicity, here’s the basic formula you can use to calculate ARV (we’ll break down everything in more detail here shortly).
ARV = Average Price Per Sqft of Comparable Properties x Your Property Square Foot
ARV Vs. Some Other Important Metrics
Obviously, ARV isn’t the only critical metric that real estate investors should be aware of.
Here are a few other noteworthy metrics and how they relate to ARV.
Annual Rental Value Vs. After Repair Value
Because they would have the same acronym, Annual Rental Value is sometimes confused with After Repair Value (even though they’re completely different metrics).
For the sake of clarity, here’s the distinction…
Annual Rental Value — The estimated annual income generated by a rental property, taking into account occupancy costs.
After Repair Value — The expected market value of a property after it’s been repaired.
LTC Vs. ARV
It’s also important to note that ARV is primarily used on residential properties like single-family homes that are already built.
LTC (or the loan-to-cost ratio) is the metric that developers and commercial real estate investors prefer for estimating the profitability of a property. It’s most often used to compare loan costs to building costs for the purpose of assessing the level of risk involved in the project.
The formula for this is pretty simple and worth knowing if you plan to do development or construction projects.
LTC = Loan Amount / Total Project Cost
NOI Vs. ARV
What about buy-and-hold investors?
Wholesalers and house flippers use ARV to determine the profitability of their deals.
Buy-and-hold investors (such as those who use the BRRRR method) might play with ARV as well, but NOI (net operating income) is just as important of a metric for those who are focused on the long-term returns of their investment properties.
NOI will give you the amount of profit that you’re making on a given property. The formula is very simple…
NOI = Property Revenue – Property Expenses
How to Calculate & Use ARV
Now let’s dive into the specifics of how to calculate ARV.
There’s quite a big learning curve for those who are new to real estate investing.
But we’ll guide you through the entire process here, step by step.
Step 1. Gather Data
For these steps, we’re going to pretend that you’ve found a property you’d like to flip.
The first thing you want to do is gather data about the property. Here are some things you want to know…
Neighborhood Desirability — How desirable is the neighborhood for current buyers? If you’re not sure how to answer that question, don’t hesitate to ask a real estate agent (or two) for their opinion.
School Districts — Is the property in a desirable school district? Or an undesirable one? This can have an impact on its value.
Property Specifications — How many bedrooms and bathrooms does the property have? How many square feet is it? Does it have a garage? This is where you’re going to gather as much specific information about the property as possible. The more you learn, the more accurate your ARV calculations will be.
Step 2. Run Comps
In the real estate investing world, “comps” stands for comparables.
This is the part of the process where you determine what similar properties are selling for — similar location, similar size, a similar level of desirability, and recently sold… the more similar your comparable properties are to your investment property, the more accurate your estimations will be.
This is the best and easiest way to determine the ARV of your property.
And the best part is… you don’t need access to the MLS.
Check out the videos below to learn how to do this on Zillow…
And on Propstream…
Running comps will give you the ARV of the property — it’ll tell you how much the property will be worth on the market once you’ve repaired it.
If you’re struggling to run comps, then you might just pay a real estate agent to do it for you… or you can ask an experienced real estate investor for help.
It never hurts to get a second opinion.
Step 3. Determine Cost of Repairs
At this point, we’re moving a bit beyond ARV calculations and into the actual usage and application of ARV.
After all, ARV on its own is virtually worthless.
The real value of ARV comes into play when you’re determining how much to offer for a property so that you can ensure you make a profit down the road.
To do that, you need to determine the cost of repairs (<– click that link for a detailed guide on how to do that).
Here’s an overview of the basic process.
You’re Repairing, Not Renovating
New real estate investors often make the mistake of renovating their investment property beyond recognition (probably because they’ve watched too much HGTV).
In reality, that’s not the goal.
Whether you’re flipping or renting the property, the goal is simply to get the property up to current market standards.
You don’t need quartz countertops and wood floors and solar panels…
You just need to make the property desirable and liveable.
Walk The Property (Slowly)
The only way you’re going to be able to estimate repair costs is by visiting the property and walking through each room… slowly.
Take lots of pictures and write notes. Set aside an hour or two to really comb through damages to the property. The more information you gather, the better equipped you’ll be to make accurate rehab cost estimations.
Make Your Estimates
You’ve walked the property and taken pictures of all the damage you could find.
Now it’s time to go back to your desk and estimate the cost of all the repairs you’d need to make to achieve your ARV.
How do you do that?
Well, if you’re a new real estate investor, there’s no quick-and-easy hack. We highly recommend doing this part of the process with another experienced real estate investor (pay for their time if you have to).
Otherwise, here’s a video with three helpful and proven methods for estimating the cost of repairs.
Don’t Forget Additional Costs
After you’ve made your repair cost estimations, there are a few more things you need to factor in. These are what we call “Additional Costs” and they include:
- Inspection fees
- Utilities (turning on water, gas, electricity)
- Architectural plans (if needed)
- Contingency funds (10-20% of total repair costs)
These additional costs can quickly eat into your profits, so it’s important to make sure you factor them in when estimating the cost of repairs.
Step 4. Use The 70% Rule (Sort Of)
Now it’s time to figure out your max offer on the investment property using something called the 70% rule.
The 70% rule is a simple way to determine how much you should offer for an investment property.
Here’s how it works…
You take the ARV of the property and multiply it by 0.7. Then subtract repair costs. That gives you the maximum amount you should pay for the property — any more than that and you’re likely to lose money.
For example, let’s say you’re looking at a property that has an ARV of $100,000. Using the 70% rule, you would multiply $100,000 by 0.7 to get $70,000. Then you would subtract your estimated repair costs (let’s say $10,000) to get a maximum purchase price of $60,000.
Keep in mind that the 70% rule is just a guideline. In reality, you may need to adjust your offer based on a number of factors, including…
- The current market conditions
- The condition of the property
- Your level of experience
- Your personal goals for the investment
The bottom line is that you should always do your own due diligence and never blindly follow any rule — even one as widely accepted as the 70% rule.
The Benefits of ARV
ARV is a helpful tool for real estate investors because it:
- Gives you a clear idea of how much money you can make on a deal
- Helps you determine whether a property is worth pursuing
- Makes it easier to negotiate with sellers
Keep in mind that ARV is just one piece of the puzzle. There are a number of other factors you need to consider before making an offer on a property, including:
- The condition of the property
- Your estimated repair costs
- Your desired profit margin
- The current market condition
If you’re new to real estate investing, we recommend working with an experienced investor or mentor. They can help you navigate the ins and outs of the business and avoid common mistakes.
The Darkside of ARV
While ARV can be a helpful tool, there are also some potential downsides, including:
It’s just an estimate — If you don’t have experience rehabbing properties, it’s best to err on the side of caution and use a lower estimated ARV.
It’s just a snapshot in time — ARV can change after a few months. The longer you hold a property, the more risk there is that market fluctuations will make your initial estimates inaccurate.
Unforeseen expenses — There’s always the potential for unexpected repairs or other costs that can eat into your profits. It can lead to overpaying. If you’re not careful, you can easily get caught up in the excitement of a deal and end up paying more than the property is actually worth.
Big learning curve — Determining ARV can be complicated, especially if you’re new to real estate investing. It takes time and experience to become good at it.
How To Use ARV For Different Real Estate Investing Business Models
Now that you have a better understanding of ARV, let’s take a look at how it can be used in different real estate investing business models.
If you’re flipping houses, ARV is probably the most important number in your business. That’s because your offer price is based on the property’s ARV minus your estimated repair costs. In fact, ARV is primarily used by house flippers.
If you’re wholesaling properties, ARV is also an important number. That’s because it will help you determine the maximum price you can offer to a buyer. When using the 70% rule, however, you’ll also need to account for your own assignment fee.
If you’re buying rental properties, ARV can be helpful, but it’s not as important as it is for flippers and wholesalers. You might still use it, though, to determine the general value of a property you plan to fix up.
Real estate investing can be a great way to build wealth over time, but it’s important to understand the basics before you get started.
In this article, we’ve covered ARV (After Repair Value), one of the most important concepts in real estate investing.
We’ve also looked at how ARV can be used in different business models and discussed some of the pros and cons of using it.
If you’re new to real estate investing, we recommend working with an experienced investor or mentor who can help you navigate these waters and avoid common mistakes.
Now you’re that much more equipped to start (or grow) your real estate investing business.
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