If you are an investor who does real estate investing, then you might already know about the term ARV. The ARV stands for the After Repair Value, which can be said to be the estimated repair cost for the real estate investment that you have made.
Real estate professionals look for the after-repair value of the property that they are going to buy at the market value. We all know that for real estate investors, it is not a big deal to invest a few thousand dollars to make profit margins by buying properties at the value in the market.
So, we are here with this guide to tell you about the ARV rule and how to calculate the ARV price for the purchase of the house property that you are going to buy at the current market price in Canada.
We will also tell you why you should calculate ARV for the distressed property that you are going to buy in Canada Real Estate.
Quick Summary
- The impact of renovations on ARV can vary significantly by region.
- Kitchens and bathrooms are the most popular renovations, often yielding the highest return on investment (ROI).
- The Canadian Real Estate Association (CREA) reported that the average home price in Canada increased by 21% year-over-year as of 2021, driven in part by high demand and limited supply, which also influences the potential ARV for renovated properties.
What is ARV in Real Estate?
The ARV, which is known as After repair value, is the estimation of a property's value after repair and all upgrades are completed for the subject property.
This is a very important term for the real estate investor as through it they will get to know the purchase price of the investment property for which they will need to do the repair and for a developed house that is going to be fully repaired.
By this, they will be able to calculate the profit margin money that they will be getting after repairing or renovating a house. There are a lot of things assessed to calculate ARV value.
Investors who have been in the real estate field for a long time will be able to easily calculate the after-repair cost based on their knowledge of the market price. However, it will be hard for beginner investors to calculate ARV value for the properties as they don't have proper knowledge about the market price.
Annual Rental Value
A lot of beginners in the real estate market seem confused between the Annual Rental Value and After Repair Value and they make mistakes in calculating repair costs.
The annual rental value means the yearly cost for an occupied space and the after repair value means the amount which is required for making the repairs needed in the house.
The Annual Rental Value is calculated for the business purpose by the real estate agent and owners.
So, don't feel confused between two of these things.
Maximum Loan To Cost in Real Estate
Commercial investors use different formulas to estimate their property's profits so that they can make more money than comparable properties in that range.
The LTC is mostly used for the purpose of evaluating the financing costs of the given property.
By calculating the LTC, the developers can assess the level of risk involved in a project, the maximum loan amount that can be sanctioned, determine whether they can maximize profits or not, property taxes, total sales price, determine repair value, and much more.
So, we will suggest that you should also do these types of calculations to know the right price of the subject property. These tools will give you a good approach so that you can also start investing in property.
How To Get ARV Value in Canadian Real Estate
There are different ways available to calculate the after repair value in Canada Real Estate. So, we are here with some of them which you can check below.
The 70% Rule
Most investors follow the 70% rule when they are going to invest in real estate. This is going to be very useful for flipping houses. By this calculation, the investor will be able to secure funding for the investment property.
They can also get the house at a discounted amount. The 70% rule includes some formulas that you need to follow based on your analysing skills and market data. Here are the formulae that you can follow:
Sale Price of Property + Value of Repairs Property = After Repair Value of Property
You will need to have the data for the repair costs for the property. Now, you will need to apply the 70% rule here. With this, you will get an idea of investment for the property.
It will be as follows:
(ARV of Property x 0.7) - Repair Cost of Property = Maximum Purchase Price of Property
How To Calculate
ARV Calculation Example Using 70% Rule
| Component | Example 1 | Example 2 | Formula/Notes |
|---|---|---|---|
| Purchase Price | $100,000 | $1,200,000 | Current asking price |
| Estimated Repair Costs | $25,000 | $150,000 | Contractor estimates |
| After Repair Value (ARV) | $125,000 | $1,350,000 | Purchase + Repair costs |
| 70% of ARV | $87,500 | $945,000 | ARV × 0.7 |
| Maximum Purchase Price | $62,500 | $795,000 | (ARV × 0.7) - Repair costs |
| Current Asking vs. Max | $100k vs $62.5k | $1.2M vs $795k | Shows if deal works |
| Deal Viability | ❌ Overpriced | ❌ Overpriced | Need lower purchase price |
Estimate All The Costs & Expenses
The investor should have a proper contractor who can properly estimate the value of the costs & expenses on the property. By this, they will be able to get a proper estimation of all the costs & expenses that they will have to pay [1].
Proper Analysis
The proper analysis is going to help you in getting the proper ARV for the property. Through it, you will be able to determine the selling cost, profit margin, repairing cost, etc.
It can only happen with the help of comparable sales in the same location. On the other hand, it can include the duration of the time period.
To do this, you will have to gather the information which will be based on the following:
- Houses are sold within a duration of time (mostly 90-120 days)
- Size, square footage, age, and room count of the house
- Houses that are investment property within one mile
Some other things that the investors should keep in mind include the present market conditions, demands, popularity of the location, interested buyers, and much more. This will be helping you a lot in making good profits.
Some Tips For Calculation of ARV
Here are some tips for the proper calculation of ARV in Canada Real Estate.
Better Team Member
We will suggest that you should have proper team members who have expertise in different types of fields. For instance, repairing, trends, analysis, etc. As a result, it will help you have some good profitable projects.
Proper Repair Estimates
If you have good relationships with the contractors, then you will be able to get proper estimations. Through this, you will get to know about after-repair costs.
Sometimes the investor also sees changes in the estimation costs. This happens only because they have no proper contractors who are working on their team.
Market Analysis
It is a suggestion that you should have proper knowledge of the market trends that are going on. This will help you to know whether you will be going to make good profits or not.
Should You Hire an Agent or Not?
You will be able to hire a real estate agent who has a great knowledge of the recently sold houses. However, they will not be able to determine whether you should purchase this real estate or not.
This is because they will not be able to tell whether it will be profitable at this purchase price or not. But still, many wholesale real estate investors have a team of agents in their real estate team. They help them in knowing about good investment property recently sold.
This is because the real estate wholesalers believe that the agents will have a number of comparable properties to investors. It will take a few weeks for the proper evaluation due to which the potential client might change their decision.
Now, let's move to the way that you can calculate a more precise ARV as a real estate investor for comparable properties.
FAQs
1. What exactly is ARV and why is it important for Canadian real estate investors?
ARV (After Repair Value) is the estimated market value of a property after all renovations and repairs are completed. It's crucial for investors because it helps determine the maximum purchase price, secure financing, calculate profit margins, and assess whether a property flip or renovation project will be profitable.
2. How does the 70% rule work in Canadian real estate investing?
The 70% rule states that investors should pay no more than 70% of a property's ARV minus repair costs. Formula: (ARV × 0.7) - Repair Costs = Maximum Purchase Price. This rule helps ensure adequate profit margins and accounts for holding costs, unexpected expenses, and market fluctuations.
3. What's the difference between ARV and Annual Rental Value?
ARV (After Repair Value) estimates a property's worth after renovations, while Annual Rental Value calculates yearly rental income from an occupied space. ARV is used for flipping and renovation projects, while Annual Rental Value is used for rental property investment analysis and business purposes.
4. How do I accurately estimate repair costs for ARV calculations?
Work with experienced contractors for detailed estimates, break down costs by room and renovation type, research local material and labor costs, add 10-20% contingency for unexpected issues, and get multiple quotes for major work. Kitchen and bathroom renovations typically offer the highest ROI in Canadian markets.
5. What factors should I consider when calculating ARV in different Canadian regions?
Consider local market conditions, recent comparable sales within 1 mile, regional renovation costs and labor rates, local buyer preferences and trends, seasonal market fluctuations, and municipal regulations affecting renovations. The impact of renovations can vary significantly between Toronto, Vancouver, Calgary, and smaller markets.
Smart Renovation Choices for Higher Property Values
It's hard for beginners to determine the ARV without any previous experience. So, for this, we have suggested some tools that they can follow to do this along with the formulas and tips.
So, we hope this will help you in determining the ARV in Canada Real Estate.
For more similar articles and listings in Canada, check Precondo.
References:
- https://wowa.ca/calculators/closing-costs
