What Is The 70% Rule In House Flipping?

What Is The 70% Rule In House Flipping?

The 70% rule is a guideline that helps real estate investors determine the maximum amount they should spend on a property when flipping houses. According to the rule, investors should aim to buy a distressed property for no more than 70% of its after-repair value (ARV) minus the cost of renovations.

This rule helps ensure that investors can make a profit when they sell the property after fixing it up. It is important to note that the 70% rule is not a strict rule, but rather a general guideline that should be used in conjunction with market research and the advice of real estate professionals. By following the 70% rule, investors can minimize the risk of overspending on a property and maximize their potential profit.

Key Takeaways:

• The 70% rule helps real estate investors determine the maximum amount they should spend on a property when flipping houses.
• Investors should aim to buy a distressed property for no more than 70% of its after-repair value (ARV) minus the cost of renovations.
• The 70% rule is a general guideline that should be used in conjunction with market research and the advice of real estate professionals.
• By following the 70% rule, investors can minimize the risk of overspending on a property and maximize their potential profit.
• Market conditions and the competitiveness of the real estate market may require adjustments to the 70% rule.

How Does The 70% Rule Work?

The 70% rule is a powerful tool that real estate investors use to determine the maximum amount they should spend on a property when flipping houses. By following this rule, investors can ensure they are making a sound investment and maximizing their potential profit. So, how exactly does the 70% rule work?

The calculation is quite straightforward. First, investors estimate the after-repair value (ARV) of the property, which is the anticipated selling price after renovations. They then multiply the ARV by 0.7, which represents the 70% rule. Finally, they subtract the estimated cost of repairs from this figure to determine the maximum price they should pay for the property.

For example, let’s say an investor estimates that a property will have an ARV of $200,000 and the cost of renovations is estimated at $30,000. Applying the 70% rule, the investor would multiply $200,000 by 0.7 to get $140,000. By subtracting the estimated $30,000 of repairs, the investor should not pay more than $110,000 for the property.

It is important to note that the 70% rule should be used in conjunction with market research and advice from real estate professionals. Market conditions and the competitiveness of the real estate market can impact the applicability of the 70% rule. In hot markets, investors may need to offer a higher price, while in buyer’s markets, they may be able to offer a lower price. Adjustments to the 70% rule may be necessary to ensure a successful investment.

Example Calculation Using the 70% Rule

Will The 70% Rule Work For Me?

When considering whether the 70% rule is the right strategy for your house flipping venture, there are a few factors to take into account. While the 70% rule is a valuable guideline for quickly renovating and selling properties, it may not be as effective for those who have a different investment strategy in mind.

If your goal is to hold onto a property for a longer period of time or rent it out, the 70% rule may not align with your objectives. In these cases, it is important to consider alternative methods for calculating the maximum buying price that will help you achieve your specific investment goals.

Additionally, keep in mind that the 70% rule is not a one-size-fits-all solution. Market conditions and the competitiveness of the real estate market can impact the effectiveness of the 70% rule. In hot markets, where home prices are high and properties are selling quickly, you may need to adjust the rule and consider offering a higher price, potentially up to 85% of the ARV minus renovation costs.

Conversely, in a buyer’s market where homes are not selling quickly, you may be able to offer a lower price than suggested by the 70% rule. It is crucial to stay informed about the current market conditions and consult with real estate professionals who have expertise in your target market. They can provide valuable insights and help you make informed decisions when applying the 70% rule to your house flipping projects.