What is the 70% Rule in House Flipping?
Have you heard the phrase “70% Rule” when flipping houses? If it has you scratching your head, you’ve come to the right place. The 70% Rule for house flipping is surprisingly simple. It is a formula real estate investors and house flippers use to calculate the amount they should pay to purchase a property and still make money on the project. After all, making money is your main goal of flipping houses.
Of course, while it is called the 70% Rule, it is more of a guideline than a hard and fast rule. There are situations when the rule can come in handy, but there are also some exceptions that make the rule unnecessary. Keep reading to learn more about the 70% Rule and how it can benefit your next property flipping project.
How is the 70% Rule Calculated?
Even if you are not a fan of math, you can easily do the calculations associated with the 70% Rule. The rule involves calculating 70% of the After Repair Value (ARV) of a property and subtracting your repair costs. Written out as a formula, the 70% Rule is:
(After Repair Value x 70%) – Repair Costs = How much you should pay for a property
The 70% Rule in Action
For example, if you are looking at a property with an estimated ARV of $160,000 that requires $30,000 of repair, you should pay $82,000 for the property according to the 70% Rule.
The 70% Rule is designed to help you calculate your purchase price while leaving enough room for a profit. Of course, this requires being able to figure out the After Repair Value of a property.
What is the After Repair Value?
The ARV is the property’s estimated value once you complete all repairs and fixes. You can calculate the After Repair Value of a property by adding the purchase price and the value of renovations. By factoring in 70% of this amount, you are leaving room for profit and a financial buffer.
Is the 70% Rule Accurate?
More experienced house flippers do not seem to follow the 70% Rule. Instead, they recommend writing out all costs associated with a property to determine the potential profit. This method helps you more accurately assess the risk of investing in a property as well as your potential for reward.
Consider the following costs when evaluating the purchase price of a property:
- ARV
- Repair costs
- Unknown costs (buffer or cushion for unexpected items)
- Commission fee
- Title insurance
- Closing fees
- Insurance, utilities, and maintenance while you own the property
- Financing terms
- Loan costs
- Selling costs
Taking your total costs and subtracting them from the After Repair Value of a property can give you an accurate estimate of your break-even point. This is the amount you can spend on a property and not lose money. From there, you can factor in the profit you would like to see from the property to determine your optimal purchase price.
Sometimes, the number you come up with through the longer method is close to the 70% Rule, but that is not always the case. You can use the 70% Rule to check your work or have a quick way to compare multiple properties with limited information.
Should you use the 70% rule when flipping houses?
The state of the market may influence your use of the 70% Rule. If the market is appreciating, you may be willing to pay more for a property. This can cause issues because you are assuming the markets will go up, which is never a guarantee.
Over time, you are likely to develop your own rule for determining an optimal purchasing price. The more house flips you complete, the easier it will be to calculate the profits you need and the After Repair Value of a property. The 70% Rule can serve as a starting point for your calculations, but there are usually more factors to consider than the formula allows for.
It is always recommended to think through every cost associated with your flip, not just what is included in the 70% Rule. More goes into a home flip or renovation project than simple repair costs. If you fail to consider these costs, you can end up with less of a profit than needed once it is all said and done. The 70% Rule may be fast, but it is not always accurate.
Find a safety net for house flipping
The purpose of all of these calculations is to ensure you make money on your flipping project. The scariest thing for new or experienced home flippers is investing in a project and losing money along the way. Whether you are just starting your flipping career, or you have completed many projects, find an experience, trustworthy partner.