The Ultimate Guide to After Repair Value for Real Estate Investors

If you're looking to learn more about After Repair Value (ARV) for real estate investors, then check out our Ultimate Guide to After Repair Value for Real Estate Investors.

After Repair Value is the value of the property after you complete any improvements.

It is used most often at the time of purchase, but could also be used when making improvements to a property you already own.

It is often, but not always, the Property Value when making a purchase.

Determine ARV Using Comparable Sales

If you're looking to purchase a property and are wondering what to use for ARV after you doing the fix up on the property, you can often use recent comparable sales to the property in its improved, fixed up condition to determine what the value will ultimately be after you complete your improvements.

Here's a class I taught on how to use comparable sales to determine property values.

Calculating Appreciation

When we calculate appreciation, we have two types of appreciation: organic and forced.

Organic appreciation is usually calculated from the ARV or Property Value (not necessarily the Purchase Price).

Forced appreciation is typically the difference between the Purchase Price and the ARV. Or, especially when you already own the property, the amount of extra value added from improving the property.

Here's an example of how we calculate appreciation on a rental property:

Appreciation

Organic Appreciation $7,834
+ Forced Appreciation + $0
Total Appreciation = $7,834

Let's walk through calculating Appreciation for Typical 25% Down Payment Gainesville, Florida Rental Property.

First, there's organic appreciation and forced appreciation.

Organic Appreciation

Organic appreciation is the tendency that properties become more expensive over time. Some would argue that, at least part of it, is from inflation.

Ultimately, to calculate the organic appreciation we will need the current value of the property and Appreciation Rate.

Both the current value of a property and the appreciation rate are easy since they both are primary inputs that do not require any real calculation.

Organic Appreciation

Property Value $261,142
× Appreciation Rate × 3%
Appreciation = $7,834

That means that we're estimating Typical 25% Down Payment Gainesville, Florida Rental Property will naturally and organically appreciate $7,834.26 over a full year.

Forced Appreciation

Forced appreciation from buying a property at a discount and/or improving the property to add value.

To calculate forced appreciation—especially on a new purchase—we will take the difference between the Purchase Price and the After Repair Value of the property.

Forced Appreciation

After Repair Value $261,142
- Purchase Price - $261,142
Forced Appreciation = $0

That means that we're estimating Typical 25% Down Payment Gainesville, Florida Rental Property was forced to appreciate $0 by buying at a discount and/or improving the property in the next year.

It is not uncommon to have zero or even negative forced appreciation on a property when acquiring it. In fact, sometimes we deliberately trade the short-term benefit of buying a property at a discount to select a property that is likely to see better than average organic appreciation in the long-term. Think of this as: selecting a high quality, in-demand property that is likely to continue to increase in demand in the future and grow faster than inflation and other properties in different areas or with different characteristics.

Total Appreciation

The total appreciation is the sum of the estimated organic appreciation and the estimated forced appreciation over the next year.

Total Appreciation

Organic Appreciation $7,834
+ Forced Appreciation + $0
Total Appreciation = $7,834

For Typical 25% Down Payment Gainesville, Florida Rental Property we're estimating the organic appreciation of $7,834.26 plus the forced appreciation of $0 gives us an estimated total appreciation of $7,834.26 in the next year.

After Repair Value When Analyzing Deals

The World's Greatest Real Estate Deal Analysis Spreadsheet™
The World's Greatest Real Estate Deal Analysis Spreadsheet™

When analyzing deals using The World's Greatest Real Estate Deal Analysis Spreadsheet™, you enter in what your estimate of property value is in the input field labeled After Repair Value (ARV).

This can be different than the purchase price (which has its own input field on the spreadsheet).

You can also override the ARV during your ownership period at any time (using the overrides tab) if you improve the value.

Primary Input

After repair value Primary is considered a primary input in the Hierarchy of Real Estate Metrics.

It is used as an input to Calculate Appreciation.

Leave a Comment