The house doesn't always increase in value by the exact amount of the repairs. It doesn't do it in the example you cited. $100,000 asking price, plus $25,000 renovation = $125,000. You said the ARV would be $150,000 - $175,000.
There is TONS of information here on BP to help you learn to calculate the ARV of property.
I suspect you need to know more than just how to calculate ARV. Start with the Ultimate Beginners Guide. It will explain ARV and much more.
Also watch/listen to the interview with Will Barnard. It's all about ARV. It's from 2011, but the process didn't change.
I answered this question on Quora a couple years ago and it got over 150,000 views, so I'm guessing it's a decent response to the question... I'll just cut and paste it here:
"There are two main ways that house flippers are able to overcome the (very real) problem that most renovations don't increase the value of a property by at least 100% of the cost of the renovations:
1. First, most house flippers are skilled at buying well below market value. If you buy a house that requires $50K in renovations for $50K below market value (value after renovations), then like you surmised, there is no profit to be made -- after the renovations, the house is worth what you paid plus what you spent in renovations. This is what many homeowners will do when they purchase a house.
But, an investor would attempt to buy that same house for (as an example) $200K below market value (value after renovations), instead of just $50K below market value. That way, after the investor puts $50K into renovating the property, he still has $150K in equity. Some of that will get eaten up by fixed costs (purchase costs, holding costs and selling costs), and the rest of that equity is profit in the investors pocket.
One reason a smart investor can purchase properties well below market value is by focusing on properties that have little demand (i.e., little competition for the investor). As an example, a house that requires $50K in structural work to be inhabitable might be so difficult for other buyers to purchase that a smart investor can pick up that property for much, much less than $50K below market value (and keep the spread as profit).
Now, you might wonder why a homeowner (or another investor) wouldn't come in and pay closer to market value, spend $50K on structural repairs and then have some equity in the house. The answer is that, if a house is in very poor condition, a homeowner will likely be unable to get a loan on the property; without cash, a homeowner can't compete for this type of property against an investor who does have cash. And other investors are often scared of properties with major issues, so even other investors are often not competition for the properties in really bad condition.
In other words, most cosmetic repairs don't pay for themselves in value added to the property; but, other types of repairs (structural, additions, basement finishing, etc) can often more than pay for themselves because there is little competition and the investor can pick up the property for a great price.
2. The second way that an investor can overcome the issue of renovations not paying for themselves is to do the types of renovations that DO pay for themselves. There are certain types of renovations that -- because they change the fundamental demand for the property so greatly -- can easily add more value than they cost.
Some examples here are additions (adding square footage), changing floorplans (making a house more functional), adding bathrooms or bedrooms (changing the buyer demographic), tearing down and rebuilding, etc. These types of renovations put the property in a new category, where the value of the house isn't incrementally increased, it is increased via step-function to a new class of property.
Because these types of renovations are difficult, risky, require experience, require vision, require cash, etc., most homeowners won't undertake these types of renovations and therefore can't "unlock" all the additional value themselves.
So, to summarize, the two ways that flippers make money in this business are to make money when you buy (i.e., purchase so far below market value that you have equity after the renovations) and/or make money when you sell (i.e., increase the value so much with the renovations as to put the property in a new class when you sell)."
@Maxwell Milholland Your ARV should be determined by a realtor who knows the area who can tell you what a house will go for within 1 mile radius with he updates you have, similar beds, baths, sqft and lot sqft.
All the best!
Originally posted by @Maxwell Milholland :
Thanks everybody! @@Hattie Dizmond I'm not sure if you or misread my post or what, but I'm well aware that the ARV doesn't always increase by the same amount of the renovations made. My question is why? I see a lot of posts and articles saying investor bought propert A at whatever amount, put x amount of dollars in renovations into it, and now all of a sudden the increase in the value of the property is double or more the amount spent in renovations. How is this logical and what is the principle behind this?
My apologies. You're absolutely right. I misread what you posted.
@J Scott Thank you! That definitely clears up some misconceptions that I had. I am obviously new to this whole thing, and I am considering "house hacking" my first rental property as a means to get my foot in the door. I've been scanning Zillow and redfin for weeks, analyzing information and trying to put the pieces together, but I have not yet determined the excact criteria for my search. Am I looking for fixer-uppers? Which areas should I be looking? What is an appropriate upper limit on how much I should spend on renovations? Of course, this all depends on my particular situation, but is there any general advice you can give me to help me get this real estate train rolling?