How To Calculate ARV – Simple Guide with Examples

Understanding the After Repair Value (ARV) of a property is a non-negotiable requirement for fix and flip investors. In fact, you could say that knowing how to calculate ARV is arguably the most important skill to have when analyzing a real estate deal

To calculate ARV, you essentially only need to know 3 things.

  1. The current value of the property
  2. The expected value of the property after the renovations have been completed
  3. The value of comparable properties in the area

The ARV Formula is actually very simple when you boil it down to these essentials.

This Is The ARV Formula

After Repair Value (ARV) = Value of property + Value of renovations

Example of The ARV Formula Being Used

To help demonstrate the ARV formula, let’s assume you’re looking at a $160,000 home in Princeton New Jersey, and you expect the renovations will increase the property value by $40,000. In this case, the ARV would work out to $200,000. You can see this in greater detail in the table below.

ARV Value of Property Value of Renovations
$160,000 $40,000
$200,000

Ok. So how do you estimate how much value the renovations will add?

This is where the comparable properties come into the equation. Most fix and flip investors will look at 3 or more extremely similar properties when working out the expected ARV of the investment property.

How To Calculate ARV Using Comps (Comparable Properties)

In this example, let’s assume that you’ve found a large 2 bedroom, 1 bathroom house in West Hartford, Connecticut. Your goal with the renovation is to add an extra bedroom and an extra bathroom.

Property Details Before Renovation Property Details After Renovation
Bedrooms: 2 Bedrooms: 3
Bathrooms: 1 Bathrooms: 2
SQFT (Square Feet): 1300 SQFT: 1440
Price: $171,600 Price: $232,046

You might be wondering how we arrived at an ARV of $232,046 in this particular case. We did this by finding comparable properties in the same suburb, which have very similar specs and features using our free online ARV calculator:

The calculator has located 4 comps in the same area that also have 3 bedrooms and 2 bathrooms. The average $/SQ FOOT is 161 for the comps. Now you can simply multiply this amount by the revised SQ Foot amount of your investment property, to work out the final ARV. 

Property Details Before Renovation Property Details After Renovation
Price per sqft: 132 $/SQ FOOT Price per sqft: 161 $/SQ FOOT
SQ FOOT: 1300 SQ FOOT: 1440
Price: $171,600 Price: $232,046

As you can see, calculating ARV isn’t that difficult once you understand how to determine the value of the comparable properties in the area. Fortunately, our ARV calculator makes this very easy to do.

How Is ARV connected to the 70% Rule In Real Estate?

The 70% Rule is a simple formula that property flippers can use to quickly assess the maximum purchase price of a target property. More importantly, ARV is one of the values you need to have, in order to apply the 70% rule formula. Think of it as a two-step process.  

  • Step 1: Calculate the ARV of the property

  • Step 2: Calculate the maximum purchase price of the property using the 70% rule

This Is The 70% Rule Formula:

Maximum Purchase Price = ARV * 70% – Repair Cost

70% Rule Example:

The following example should help you understand how to calculate the maximum purchase of an investment property, using the 70% rule. 

Let’s assume you are looking at a house in Boston Massachusetts, which has an after repair value (ARV) of $200,000. 

Maximum Purchase Price ARV * 70% Repair Cost
$200,000 * 0.7 $25,000
$140,000 $25,000
$115,000

In this example, the maximum purchase price would be $115,000 based on the expected ARV ($200,000) and repair costs ($25,000).

Are there any other important points worth mentioning?

Yes. You need to be aware of holding costs, loan costs, closing costs and administrative fees when analyzing a potential real estate deal. It is surprisingly common for people to ignore these costs when analyzing the potential profit they can make in a fix and flip.

Fortunately, we have a very detailed Deal Analyzer which lists all the most common costs incurred during a typical fix and flip, together with the expected loan repayments. This can help you form a concrete understanding of a deal’s potential profitability.

Final Thoughts

In this article, we have outlined how to calculate ARV, and we have explained how this value is used to determine the maximum purchase price if using the 70% rule. Our hope is that the examples have been helpful, and you now have a better understanding of all the variables involved in the ARV formula.

Keen To Learn More?

Want to learn more about starting a profitable real estate investment business?

Claim a free copy of Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business by following this link or clicking on the download button below.

Share on facebook
Share on google
Share on twitter
Share on linkedin