So, you have completed your comparative market analysis and research and finally decided on a location in which you would like to purchase your rental property. You have decided on the amount that you can afford, and arranged conditional financing – and now the fun begins!
It is time to go shopping for your investment property. You can search using online real estate sites, such as realtor.com. Sites such as this allow you to search hundreds of properties in your chosen area and also set up alerts, which let you know the minute a property which meets your criteria comes onto the market.
It also makes sense to meet some real estate agents in person, as they have a wealth of knowledge that can prove invaluable. They may also have access to exclusive properties that have not been shared online. The best tactic is to widen your search using as many angles as possible, to give you the greatest chance of finding a bargain.
No property will be perfect, and that will mean that you will need to make numerous changes and upgrades in order to achieve the overall outcome and renter appeal that you have hoped for and banked on.
Keeping all of this in mind while you are visiting potential new properties can be difficult. The asking price for a property has to be coupled with the cost of repairs and upgrades. Of course, the upgrades should add value to the property, which will hopefully exceed the cost of the work. This equation provides a figure known as the ARV, or after repair value.
ARV – The value that the property is worth after you have completed repairs and upgrades.
It goes without saying that it is vital to estimate this figure as accurately as possible, as it is one of the most important determinants of the profit you will make with your investment.
Make The REALTOR® Your BFF
The first thing in estimating an accurate ARV is to build a good relationship with your realtor. Always be honest with them about your motives and goals with investing in a rental property, and they will be more than happy to share their thoughts on the value of a property, as well as expected value increases based on their experience. They will be able to tell you specifics on other properties that appeal to renters.
Find Good Contractors
Once you have shortlisted a couple of potential investment properties, it is wise to invite several contractors to take a look inside and provide you with a written estimate for completing the work that you would like to have done.
Two or three contractors will offer you a broad enough idea of what the average cost of the work should be, plus you will be able to see immediately if one is considerably higher or lower than the others. The written estimates will enable you to compare the quotes fairly.
Be honest with the contractors that you are obtaining several quotations, and explain that you are trying to estimate an accurate ARV at this stage. Building a good relationship will pay dividends in the future. Any reputable contractor expects to spend some time providing quotes in this way, and even offering advice on upgrades that may be more cost-effective in their opinion.
You can also take your efforts a step further and research the costs of supplies and parts that you will need to complete your upgrade from local hardware and building depots. While contractors will usually receive a discount when purchasing these items, it is useful to have an idea of the figures that you should expect to pay.
Research The Market
Once you have compiled the quotations from your ‘team’ of realtors and contractors, you should have a good idea of what you will be paying out in total, and what other similar ‘fixed-up’ properties are selling for. This is the time to brush up on your knowledge of what is selling and renting well in the area.
It is not uncommon for people to pose as tenants in order to visit rental properties and speak to existing landlords about what is offered. This kind of investigation provides insider knowledge that could make your investment a real success, showing you exactly what other landlords are offering, and the amount of rent that they expect in return. It could give you the edge in offering extra value to your potential tenants, ensuring that you will never be left with an empty rental property.
The Word On The Street
The final thought is to take a close look at comparable sales in the area, with a comparative market analysis. This is the actual sales value of homes in the local area and is usually limited to sales within the last 90 days, as fluctuations over a longer period of time can make the figures useless. The radius to use in order to compare sales prices would be around 1/4 to 1/2 a mile from the property that you are considering.
When looking at comparable sales, it is important to look at properties with a similar square footage, which are a similar age and in a similar condition. If you can find a property to meet these requirements, it will give you a very accurate idea of what you should expect to pay – and this will help to make your overall ARV more accurate. Your real estate agent should have access to this information and will help you to make sense of the specifics.
Knowledge is Power
Once you have these 4 secrets covered, you will have a wealth of information at your fingertips with which to make a measured decision about whether a property will be a useful investment for you. An accurate ARV can make or break the profitability of a rental property venture.
However, even with your figures compiled so carefully, it is still wise to be conservative and work with the worst-case scenario. Markets change quickly with little or no warning, and it is always best to give yourself a margin to work within. If you find that you are unable to make a worthwhile profit with anything but the most optimistic ARV, then it may be wise to let a property pass, no matter how much you have fallen in love with it.
To conclude, do listen to the team that you build around you. It is true that they will make money from your decision to purchase, but they have experience that money can’t buy. If you trust your real estate agent and contractors, then be grateful for their expert advice. After all, they have no emotional investment in your decision and the ARV can make all of the difference to your final figures.