It is going to be very, very, important as a real estate investor to determine how much you can really pay for a property, and still make a profit. Therefore, pay attention and read every word of this real estate 101 article.
At Do Hard Money, we have come up with some really good techniques to help you determine if a property is a good deal for you. There is some real estate investing 101 terminology you need to be aware of. Let’s start with “ARV.” ARV is simply “After Repaired Value.” After Repaired Value is basically what this home will be worth once the necessary repairs are made.
When it comes to repairs, you want to make sure you are doing work that will get you more than a dollar-for-dollar return. If you put one dollar in, you want to get two dollars out. So, if you are doing carpet or paint, for instance, you want to get two dollars out for each dollar you spend. Now, there are always some repairs that you are just going to break even on.
Maybe all the doors and the garage door need to be replaced to make the property attractive and livable. If you replace the garage door, you are going to get a dollar for dollar return. You put $2,000 in, and you are going to get $2,000 out on the sales price. Or in some cases there may be repairs that you will not get anything out of.
There may be some things you won’t even get a dollar for dollar return on, but you still have to get all of the basic necessities into good shape. Replacing the driveway, for instance, doesn’t add value to the property. Everyone expects the driveway not to have a big crack in it that kids might fall into; they just take that for granted.
So, that is not going to increase the value of the property. Just because you spend $30,000 on repairs doesn’t guarantee that you are going to add $30,000 of marketable value to that property. It is important to focus on the right things, required necessities, and spend money that will get you the return you need for a profitable deal.
The things to focus on are kitchens and bathrooms. These will get you the most bang for your investment buck. Just look at the things the ladies are going to be looking for. They all want a great kitchen. They are looking for attractive, easy-to-clean bathrooms. You have to do something to make these rooms pop and give them a bit of a “wow factor.”
You need your potential buyers to start imagining themselves living in this home, and feeling the excitement and pride of ownership they would have if this property were their home. If you spend money on kitchens and bathrooms, many times potential homeowners will be willing to take care of things like landscaping the backyard themselves.
They are willing to settle for potential in backyards and basements, but they want the kitchen, bathrooms, and curb appeal of their dreams waiting for them when they move in.
There are many things that you can do that will boost your ARV. “As-is” value is what the property is worth the way it is right now. After Repaired Value is what the property is worth once the repairs are done. That’s the first part of real estate investing 101 covering ARV.
Real Estate Investing 101 – Part Two
There is another valuation term that is called “AARV,” which is “Adjusted After Repaired Value.” The way to come up with AARV is a very simple formula. You take the After Repaired Value minus the cost of the repairs, and that equals your Adjusted After Repaired Value.
For example, if the ARV is $100,000, and the repairs on the property cost you $20,000, then you would take the $100,000 (the ARV) minus the $20,000 (the cost of the repairs). You end up with $80,000, which is the Adjusted After Repaired Value, or AARV.
You need to give yourself enough room for real estate agent fees and commissions, hard money costs, closing costs, and profit margin. We believe that 70% is the magic number. You are going to spend about 10% in agency fees, closing costs, title costs, and things like helping the buyers out by discounting the price.
You are going to spend another 10% for ongoing financing and upkeep of that property for your monthly payments, gas and electric, property taxes and insurance, not to mention maintenance such as watering and cutting the grass. That leaves you with about a 10% profit margin, give or take a little, so 70% is the magic number. You need a 30% margin, once you take out the cost of repairs.
If you are buying a property with an ARV value of $100,000, and the cost of the repairs is $20,000, you have an AARV of $80,000. Then, you want to take 70% of that adjusted value, which will put purchase price at $56,000 (70% of $80K).
That is going to be the most you are willing to pay for that property, so you can make money after you pay all of your bills and still leave a little margin for error in case of problems or overruns. This formula has to be your rule of thumb if you want to be a successful real estate investor.
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I hope you found this real estate investing 101 article valuable and informative. If you have any questions at all about real estate investing 101, feel free to ask me those questions using the comments form below. Thanks for reading the article. Happy investing.