Not every potential investment property on the market in the South Puget Sound area is in tip-top shape, and that’s okay. Sometimes you can maximize your profit by choosing a property that will serve your purpose and provide long-term value after it’s undergone a few renovations.
In order to carefully execute this strategy, however, you must have a firm idea of how you plan to use the currently distressed property and what upgrades will cost-effectively improve the way it looks or functions. Additionally, you should know how to calculate an after repair value (ARV) and how to use that number.
What does ARV Stand for in Real Estate?
In the real estate world, ARV simply stands for the value of a property after it has been renovated as opposed to look at the value of properties nearbyin its current condition. Occasionally, realtors, appraisers, and others in the industry may use the terms “after repaired value” or “after repairs value” but they all mean the same thing.
Simply put, you want to figure out if a certain property is worth purchasing and renovating for the purpose of reselling or renting the home or building. This calculation is also used profusely in the real-estate flipping business.
How Do I Find the ARV of a Property?
In order to determine the ARV of a property, you or an appraiser can use a simple real estate formula: (Purchase Price) + (Value from Renovations) = After Repair Value. In comparing that to only the purchase price, you derive a percentage that indicates how much you can expect the property’s value to increase.
Calculating the variables for the equation—particularly the estimated value from renovations—is the more complex part of the process. Here are the steps you or the appraiser will take to determine those numbers:
- The first step is to estimate the property’s current, or as-is, value. This is not merely the market price of the home or apartment complex, but rather, what it’s worth. A professional appraiser is the best person to give you the most accurate estimate of the property’s current value.
- From there, work on developing a repair list that outlines what renovations you intend to execute at your investment property, whether it’s adding a bathroom, opening the floor plan, or performing basic cosmetic upgrades. Certain projects—such as electrical and plumbing work—may be necessary in order to get the building up to code or to make it suitable for your desired use. There are stricter regulations for Seattle rental properties than your personal home. Other upgrades may be beneficial to improve things like your curb appeal, but they are not necessary.
- Next, look for properties in the neighborhood that are comparable to your house as it will look after the renovations are completed. For example, if you’re adding another bedroom to a four-bedroom house or transforming an outdated medium-sized kitchen into a modern, upscale space, look at the value of properties nearby that possess those features.
- Starting with the estimated property value of your comparables, assess similarities and differences to generate your property’s estimated ARV.
Keep in mind the ARV is not a definitive number or percentage. It is an educated guess or estimate based on your understanding of the local real estate market and knowledge of remodeling costs. When calculating the cost of repairs, it’s also a good idea to get estimates from several contractors to derive the most accurate numbers to use as the variable. This is a scenario where it pays off to be conservative and assume potentially higher costs than the end result.
Another tricky part of calculating ARV is there may be more repairs needed than initially meet the eye. If the damage on a property is more extensive than you realize, it could change the renovation estimate for your equation. As an investor, your goal is to make the best decisions you can and account for potential losses that may result from unseen circumstances.
What is a Good ARV?
When it comes to investing in real estate in Seattle, the rule of thumb is that you want to make at least a 30% return on investment (ROI) for a property. That means you should avoid bidding on or purchasing real estate that exceeds 70% of the ARV minus the projected cost for repairs and renovations. To calculate that number, use this formula: (AVR x70%) – cost of repairs = maximum purchase target.
If repairing or remodeling a property adds little value compared to what it’s worth in its current condition, it’s likely an undesirable or unprofitable investment. You may also have more difficulty securing financing to purchase the property and/or complete your envisioned renovation projects.
Investing in Real Estate Near Seattle
There’s a lot that can be gained from buying a distressed home or building, renovating the space, and turning it into a rental property. With the right investment property, you can turn a profit for many years to come. In order to protect and make the most of that investment, consider partnering with Powell Property Management. We offer a wide range of professional services to help you market, maintain, and manage your residential properties in the Seattle area.