If you already have the time to focus as a single-family rental home investor in Pasco, one very important term 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 specifically, ARV refers to the estimated future value of the property, including all the repairs and improvements. To recognize properly your property’s ARV before you can use it, you need to know how it works and how to calculate it accurately. Keep reading to learn how to do so.
Start With a Market Analysis
A competitive market analysis is without a doubt one of the most successful ways to calculate your property’s ARV. By merely looking at comparable properties (comps) that have recently sold, you can get a reasonable understanding of your property’s new market value. Many investors start 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, look for at least three recently sold comps (i.e., sold within the last 90 days) that detail recent upgrades or improvements.
Calculating ARV
Once you have found three or more decent comps, you will then calculate your property’s after-repair value (ARV). There are two traditional 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
If you by now understand your property’s ARV, you can use it in several ways. First, it can help you to set a more accurate rental rate. By attempting to understand how your newly renovated property compares to others in the neighborhood, you can make the most out of your rental home’s potential. One more way that investors frequently use the after-repair value is when purchasing investment properties.
When purchasing a new Pasco 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 finished renovations on your investment property? Contact Real Property Management Tri-Cities and request a rental market analysis to ensure you stay competitive. Call us at 509-572-5440 to speak with a Pasco property manager today.
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