Have you ever thought I want to flip houses? Have you thought how do I make sure I don’t lose money? Or know it is a good deal? Well that is when 70% rule comes into play.
What is the 70% Rule?
The 70% rule is basically you should only pay 70% of the ARV (After Repair Value) of a property minus the repairs needed. The ARV is what the value of the home or property will be worth after it is repaired.
Example:
If a home’s ARV is $100,000 and it needs $15,000 in repairs, then the 70% rule states an investor should pay $55,000 for the property. $100,000 x 70%= $70,000 – $15,000 =$55,000.
Is the 70% rule realistic?
It is even though it can be hard to find depending on your market. I use this rule as a rule of thumb and usually my numbers come pretty close to the 70% rule once I have broken it down (give or take 2-5%).
After Repair Value – $100,000
- Repairs – $15,000
- Unknown Costs- $3,000
- Closing – $3,500
- Holding Cost- $2,000
- other loan costs- $2,000
Break-even point – $74,500
So If you bought a house for $55,000 and sold it for $100,000 the profit would be as follows.
Sell – $100,000
Costs – $25,500
3% commision on sell – $3,000 (if your not an agent)
Purchase price- $55,000
Profit- $16,500
Should You Use The 70% Rule?
A lot of investors try to stretch the 70% rule or whatever rule they follow, but I think it is a mistake. The key to success in house flipping is staying disciplined. If the numbers are not there don’t force it, don’t bank on appreciation. If appreciation does happen count it as a bonus.
The 70% rule is one of the rules that I think is a great tool for investors. Typically if you follow this rule and you are disciplined you will make a profit (or at least not lose money).
My advice is whatever rule you decide to follow stick to it. Whether is it is the 70% rule, or if 80% rule works well for your area that is fine. Just follow your plan, rules, and processes. Don’t get wrapped up in the shinny object syndrome which may blind you on making good decision.
Good luck with your investing.
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