Preparing to start as a single-family rental home investor in Framingham means you have to learn this important term: After Repair Value (ARV). The after repair value of a property means 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.
Do a competitive market analysis to calculate your property’s after repair value. That is one of the best ways to do it. To get a good idea of what your property’s new market value could be, try looking at recently sold comparable properties (comps). Searching the multiple listing service (MLS) is a good start. This is what many investors do. Run a search for recently sold properties that are similar to your new, improved rental house. Comps that are very similar to your property in age, size, location, construction method and style, and condition are what you should look out for. Keep an eye out for at least three recently sold comps (i.e., sold within the last 90 days) that detail recent upgrades or improvements.
When you have found three or more decent comps, you can now calculate your property’s after repair value. One of the ways you can calculate it 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. The figure you come up with will be your property’s after repair value (ARV), a number that should be used to estimate the likely sales price of your single-family rental house after improvements and repairs.
Figuring out the average price per square foot of your comparable properties is another way of calculating your property’s after repair value. You can do this by dividing 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 is a bit more precise than the first option, however, it requires a few extra steps.
Once you know your property’s ARV, you can use it in several ways. One, it helps you set a more accurate rental rate. You can make sure that you are maximizing your rental home’s potential when you understand how your improved property compares to others in the neighborhood. An investor may also use after repair value when buying investment properties.
When investing in a new property, take 70% of the property’s after repair value and subtract the cost of repairs and improvements. The resulting amount 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. Consequently, 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. A lot of investors learn to do so on their own. However, others may seek the assistance of a real estate professional or property management expert. Either one can help you ensure that your calculations reflect the true nature of the property, its location, and its future potential as a rental house. They can also locate comparable properties for you.
Have you recently completed renovations on your investment property?
Request your FREE rental market analysis and ensure you stay competitive! Get in touch with Real Property Management Metro West-Worcester now! Call us at 508-329-6000 to speak with a Framingham property manager today.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.