Key terms used by Real Estate Investors. What are they and what do they mean?
A successful Real Estate Investor has a good understanding of the key terms that Real Estate Investors use, what they mean, and how the values for the terms are determined. Once these keys terms are understood, then the Real Estate Investor can begin to understand and be successful in the Real Estate Investing business.
Over the next several blog posts I will be digging deeper into the key terminology, explaining the meaning of them, and how they are determined. The last post in this series will bring it altogether to look at the potential profit or loss of a Real Estate Investment.
The terms we will be discussing are After Repair Value (ARV), Initial Purchase Cost, Repair Costs, Financing costs, Transaction costs, Buying & Selling costs, Holding cost, and Profit/Loss. Each of these terms is important and can have a big impact on the ability of and Real Estate Investor to make a profit. The potential profit or loss in a Real Estate Investment can be calculated by this formula:
After Repair Value – repair cost – financing cost – transaction cost – buying and selling costs – holding cost – initial purchase price = potential profit/loss
After Repair Value (ARV)
After Repair Value (ARV) is the value of the property once it has been renovated and is ready to be sold. It is the amount that a Retail buyer would be willing to pay for the property. In last week’s post on “I want to BUY Homes and Sell Homes, but what is a Fair Price” I discussed how to determine what is a fair price for a property. In that article, I explained that using a Real Estate Broker to complete a Comparative Market Analysis (CMA) is the most accurate way to determine a fair price. Check that article out for a deeper understanding of CMA and other methods to determine a fair price for a property
The ARV is determined much the same way. The only difference is, instead of using the “as is” condition of the property when doing the CMA, the Real Estate Broker would use the planned condition of the property after it has been repaired. For example, let’s assume the investor is planning on renovating the kitchen so that it has the best kitchen of the houses that are being compared. Then when the ARV is completed, the comparable properties would have the price adjusted as if the kitchen was not in as good of condition as the planned renovation of the investment property. This would improve the ARV of the investment property.
Determining an accurate ARV takes skill based on experience and current knowledge of the Real Estate Market. A Real Estate Broker is best positioned to help complete this analysis. In a future post, I will give a more detailed analysis of completing a Comparative Market Analysis (CMA) and using those techniques to determine a After Repair Value (ARV). Next week will be looking at Repair Cost.