If you are going to be a single-family rental home investor in Key West, one of the most important terms you need to know what After Repair Value (ARV) is. The value of a property that has been fixed up or renovated is called the after repair value. 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.
To calculate your property’s after repair value, do a competitive market analysis. That is one of the best ways to do it. Look at comparable properties (comps) that have recently sold so you get a good idea of what your property’s new market value is going to be. Newly-sold properties similar to your new, improved rental house will most likely be listed so most investors would start by searching the multiple listing service (MLS). To start, you will want to find comps that are very similar to your property in age, size, location, construction method and style, and condition. Look for at least three recently sold comps (i.e., sold within the last 90 days) that detail recent upgrades or improvements.
Calculate your property’s after repair value after you have found three or more decent comps. One way is to compute the average sales price of the comps 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. The answer to your computation is 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.
If you want to be more precise, you can calculate your property’s after repair value by figuring out the average price per square foot of your comparable properties. Dividing the total sales price by the average square footage of your comps will give you this number. 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 will a bit more precise than the first one, although you will need to do a few extra steps.
Once you know your property’s ARV, you can use it in several ways. For one, it helps in setting a more accurate rental rate. Once you understand how your improved property compares to others in the neighborhood, you can be sure that you are maximizing your rental home’s potential. After repair value is also one figure investors use when buying investment properties.
When purchasing property for investment, take 70% of the property’s after repair value and subtract the cost of repairs and improvements. The resulting figure will be the offer price. This will help you 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. Don’t forget that the higher the ARV you use to determine your offer price, the higher the risk for your profit margins after the fact.
Calculating an accurate after repair value takes practice and skill. While several investors learn to do so on their own, you can opt to seek the assistance of a real estate professional or property management expert. Both can help you locate comparable properties and at the same time ensure that your calculations reflect the true nature of the property, its location, and its future potential as a rental house.
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