ARV rule of thumb?

Question

Are there any formulas, rules, etc I can use to understand after repair value? E.g. if I spend 20k on improvements what will that do to my ARV? I image if I put 20k into a 500k property it wouldn't have as much impact as if I put 20k into a 100k property? Likewise I'm sure adding bedroom, sqft, etc has more impact than paint and flooring. I'm asking in regards to either SFH or SMF and long term rental, so I'm not considering snow cone makers.

Eliott Elias · Answer

Use the 70% rule. Offer = .7*ARV - Rehab

Carlos Ptriawan · Answer

Basically you need to understand comps. Since most "good rehab" project would cost minimum 50k (to 100k), so you want to buy in the area where median price/comp is 600-700k. I am thinking ARV as more like a financial model to the comps. If you keep flipping in $80k neighborhood you may even waste your money and time.

Chris Moton · Answer

Craig, there are several ways to estimate value. You can look for sales comparables that would be similar to your property with the improvements complete and use that or an average of several. If you make improvements that allow you to increase your rents, another option is to apply a Gross Rent Multiplier to get an estimated market value. The GRM is market metric you select based on the market you are in and the property type, location in the market, condition, etc that you multiply by your gross rents to get to an estimate. You can do something similar with cap rates but in that case you would be estimating your expenses as well. In any case you need to know your market and what properties are selling for with regard to comparables and/or financial metrics.

Generally speaking, yes, adding bedrooms and square footage usually more impactful than just paint and flooring but not always and adding that stuff is much more permit intensive and expensive.

Carlos Ptriawan · Answer

There's automated software on MLS that can do this. In given time, this software may do automatic ARV calculation based on comps, but after investigating the house myself, I would say 0.7 ARV is actually more like 0.75-0.8. At any given time, in the whole NorCal, there're only 3 to 4 house that matched with 0.7 ARV.

Craig Cerny · Answer

Chris, This is fantastic! I wasn't understanding the value of the GRM or how to use it in a manner to determine market value. I understood the 1% rule and how with rent at 1% of PP that GRM=8.333 (100,000/(1,000*12)=8.333. I had mostly been looking at this to determine if property was even worth looking at for cashflow. After reading your response I now understand how I can use rent as a variable to get an idea of ARV. E.g...PP         | Rent   | GRM | New Rent | ARV       |------------|---------|---------|---------------|------------|100,000 | 1,000 | 8.333 | 1,100        | 110,000So with above example, I can say if a 1,000 improvement let me raise rent by 100/m I may be looking at a 10% increase in property value. I get different improvements will cost more/less and have different impact. Puzzling together the most effective improvements is the name of the game here.

ARV rule of thumb?

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