The 70% rule is a common term used by many Real Estate Investors when fixing and flipping houses. The rule is basically a standard equation to go by when figuring out how much you should pay for a property depending on its overall worth and investment costs. In general, this can be a helpful guide, but it is not a flawless solution that can be used without considering all factors of the property.
The rule states that the buyer/investor should be paying 70% of the ARV worth (after repaired value) minus the cost of any repairs needed. Therefore, if the home’s ARV is $130,000, 70% of that would be $91,000 – but the property needs a total of $15,000 in repairs. You would then subtract $15,000 from $91,000, meaning the 70% suggests that you should pay $76,000.
Should I use the 70% rule?
Some Real Estate Investors like using the 70% rule, and others prefer not to. There is no right or wrong answer, and really it depends on the actual property. However, it is important to remember there are other cost factors not included in the 70% rule equation.
For example, you should always leave a safety blanket of around $5,000-$15,000 dollars for any unexpected works or repairs depending on the size of the project. On top of this, there will be a commission fee for selling the house, the insurance fee whilst owning the house, any house/lawn maintenance fees, plus utility bills. If after you have totaled all of this up you will still be making a profit, then the 70% rule works fine. On some occasions, it can be off by a few percent.
Also having a good relationship with your Private Money Lender will help you overall with saving on fees. Real Estate Investors should look for Hard Money Lenders or Private Money Lenders who are friendly to Brand New Investors and offer reasonable rates. This will be helpful when you are trying to build up your real estate portfolio.
How accurate is the 70% rule?
The 70% rule is great for beginners who are just starting out in real estate investment, but it is not something that should be solely relied on. The rule is close to what it should be and does often result in a profit, nonetheless, it can be off by around 5% or slightly more, it is worth checking all other fees before investing so you do not end up over budget.
When buying cheaper houses, it is wise to pay slightly less than 70%, and with expensive houses, you can get away with paying slightly up to 75% ARV. As houses get more expensive the percentage gap widens between the ARV and the 70% rule’s calculated worth, making it increasingly harder to purchase a house with a 70% ARV for so little. In these cases, low bids will not work which is why you may go up to 75% ARV. Still analyze all fees that are applicable to determine the true costs and profits.
What do I need to know to use the 70% rule?
The rule is useless if you are not aware of the repairs needed, the market value, the current market success rate, plus several other factors as stated in the ‘should I use the 70% rule?’ section.
The two primary things you absolutely need to know are the ARV and the repairs. Without this information, there is a good chance you will end up losing money from the investment. Keep in mind that repairs generally cost more than you expect them to, plus, they take longer to complete.
The 70% Rule does not take outside factors of this criterion into consideration, so to be on the safe side it is recommended to also be aware of tax costs, insurance costs, and financing costs. You should take time to look at this for each property you flip as prices will always vary depending on location, property type, and the current market rate.