ARV (After Repair Value) Calculator: How to Calculate ARV & What it Means

ARV Calculator

What is ARV (After Repair Value)?

After Repair Value (ARV) is a crucial metric used in real estate investing to estimate the potential value of a property after necessary repairs and renovations have been completed.

It helps investors and real estate professionals determine the potential profitability of a distressed property or fixer-upper. ARV is used to calculate the potential return on investment (ROI), establish a suitable purchase price, and secure financing for a property.

How is ARV Calculated?

To calculate the ARV, you will need the following information:

• Current Property Value: The current market value or purchase price of the property in its existing condition.

• Estimated Repair Cost: The total projected cost of repairs and renovations needed to bring the property up to the desired standard.

• Estimated Value Increase: The expected percentage increase in the property's value after the repairs and renovations are completed.

The ARV formula is:

ARV = (Current Property Value * (1 + Estimated Value Increase)) - Estimated Repair Cost

Here's a step-by-step process for calculating ARV:

1. Assess the current property value: Determine the property's value in its current condition by researching comparable properties in the area or getting a professional appraisal.
2. Estimate repair costs: Create a detailed list of repairs and renovations needed, then gather quotes from contractors or use a cost estimating tool to calculate the total cost.
3. Estimate the value increase: Research comparable properties in the area that have undergone similar renovations to estimate the potential increase in value after repairs are completed.
4. Calculate the ARV: Use the formula above to calculate the property's estimated value after repairs.

Why is ARV Important to Real Estate Investors?

When faced with a selection of potential rental investments, it can be a daunting task to know where to start with comparing them against each other. Fortunately, there's a nice batch of metrics that can help investors make decisions quickly, such as net present value, internal rate of return, capitalization rate, and more.

For after repair value specifically, this metric excels when used in the following situations:

• Profitability assessment: ARV helps investors determine if a property has the potential to generate a profit after repairs and renovations are completed. By comparing the ARV to the total investment (purchase price + repair costs), investors can assess whether the deal is worth pursuing.

• Purchase price negotiation: Knowing the ARV helps investors negotiate a fair purchase price for a property, ensuring that they leave room for profit after accounting for repair costs.
• Rental Property Financing: Lenders often use ARV to determine the loan amount they're willing to provide for a property. A higher ARV can lead to more favorable financing terms, which is crucial for investors who rely on financing to acquire and renovate properties.

• Investment Property Exit strategy: Investors can use ARV to plan their exit strategy, such as selling the property for a profit or refinancing to pull out equity. Knowing the ARV helps investors set realistic goals and expectations for their investment.

• Risk management: ARV helps investors manage risk by evaluating the potential return on investment. A higher ARV relative to the initial investment indicates a lower risk, as it provides a buffer against unforeseen expenses or fluctuations in the real estate market.

In conclusion, ARV is a critical metric for real estate investors, as it enables them to assess the potential profitability of a property, negotiate better purchase prices, secure favorable financing, plan exit strategies, and manage risk. By accurately calculating and considering ARV, investors can make informed decisions and improve the success of their real estate investments.