The 70 percent rule is a guiding principle widely used by real estate investors to evaluate potential house flipping projects. Its simplicity and practicality make it a valuable tool for determining the maximum purchase price of a property, ensuring profitability after repairs and resale. If you're new to this concept, or looking to refine your strategy, this guide will break it down step by step.
What Is the 70 Percent Rule?
At its core, the 70 percent rule states that an investor should pay no more than 70% of a property's after-repair value (ARV) minus the estimated repair costs. The formula ensures that there’s enough margin to cover expenses and yield a profit.
Formula: Maximum Offer Price= (ARVx0.70) − Repair Costs
For example, if a property's ARV is $200,000 and repair costs are estimated at $30,000, the maximum purchase price would be:
(200,000 x 0.70) - 30,000 = $110,000
This calculation ensures you're not overpaying and have a buffer for unexpected costs.
Benefits of Using the 70 Percent Rule
Risk Management: Helps protect against unforeseen expenses.
Profit Assurance: Ensures that projects remain financially viable.
Quick Assessments: Speeds up the decision-making process for property evaluation.
Limitations of the Rule
While the 70 percent rule is a powerful tool, it’s not foolproof. Here are some considerations:
Market Variability: Local market conditions might require adjustments to the percentage used. In highly competitive markets, investors may need to work with a lower margin.
Repair Cost Accuracy: The rule relies heavily on accurate repair cost estimates. Overlooking details can erode your profit margin.
Additional Costs: Does not account for financing fees, holding costs, or closing expenses.
How to Apply the 70 Percent Rule Effectively
Research the ARV: Use comparable sales (comps) in the area to determine the ARV. Look for properties with similar size, condition, and location.
Estimate Repairs: Consult contractors or use repair estimation tools for accuracy.
Adjust for Market Trends: Analyze the local real estate market to tweak the percentage if needed.
Run Multiple Scenarios: Test different assumptions (e.g., higher repair costs or lower ARV) to assess risk.
Tools and Resources for the 70 Percent Rule
Many online calculators and apps can help streamline the calculation process. For example:
Rocket Mortgage’s Guide provides insights into using the rule effectively.
Bankrate discusses its implications in depth.
Landlord Studio’s Calculator offers a free tool to simplify your calculations.
Conclusion
The 70 percent rule is an essential guideline for anyone venturing into house flipping. By ensuring a calculated approach to property evaluation, you can maximize your returns and minimize risks. While it has its limitations, combining the rule with thorough research and market analysis can set you up for success in real estate investing.