What is the 70% Rule of House Flipping?
Seasoned real estate investors may already be familiar with the 70% rule when it comes to flipping houses. First-time house flippers will probably hear this term early on as they begin exploring their buying options. So, what is the 70% rule and when should it be applied?
Determining Your Purchase Price Point
The idea behind the 70% rule is to help fix and flip home buyers determine the maximum price they should pay for a property if they want to make a profit. In theory, the calculation for the 70% rule is quite simple. In practice, it’s just one part of a complex analytics process you should go through before even considering purchasing a property that you intend to fix and flip.
After Repair Value (ARV)
First, you must be able to project the After Repair Value (ARV) of the property. This is the selling price that you can expect to achieve after the house has been fixed up with the necessary repairs and renovations. You’ll want to figure out a realistic market value based on the property specs and the neighborhood, along with other factors. It’s a good idea to be at least somewhat conservative in your sales price projections.
In most cases, you will figure out a price range. For instance, you determine that a property should sell somewhere between $300,000 and $350,000 once it is all fixed up. Base your ARV on the low end of that price range, as in the lowest amount you think it will sell for. If you happen to make more during the sale, that’s great. Just never base your analytics on the highest end of the price range. That’s a great way to get in over your head and end up losing money on a house flip!
Next, you will need to determine the costs of the repairs and renovations. You should already have a good idea of your rehab expenses before you even make an offer on a fix and flip property. Again, it’s usually a good idea to be conservative in your estimates. However, this time you want to lean toward the higher end of your projected renovation price range. If you calculate that it will realistically cost somewhere between $20,000 and $30,000 to complete all the work that needs to be done, then base your figures on the higher number (and maybe even add a little extra just for some cushion).
It’s important to be conservative and realistic in your projections. If you only figure out your calculations based on a “best-case scenario,” you are likely to be disappointed when the fix and flip is complete.
70% Rule Calculation
As for the 70% rule, it’s simple. Subtract your projected renovation expenses from the ARV. Then calculate 70% of that total. That should be your ballpark purchase price on a property in order for it to be a profitable investment. Going back to our example, let’s say you expect the house to fetch at least $300,000 on the open market when it’s fixed up and ready to sell. You project the renovations will cost as much as $30,000. Subtracting the expenses from the resale price, you get $270,000. 70% of that is $189,000. This amount should be approximately what you are willing to pay for the property. Any more and it’s probably not worth your while. If you able to get it for less, then that leaves even more meat on the bone.
Not All Profit
Remember that this is a pretty basic calculation to help you determine an ideal buying price. Don’t assume that the extra 30% is all going to be profit. There will be other costs involved with buying, owning and selling the property. You may have real estate agent commissions for the sale. There will be home inspections, closing costs and lender fees/interest if you are borrowing any money to complete the fix and flip. Ultimately, your profit will be the final actual selling price minus all the actual expenses. The 70% rule is just one tool you can use to figure out where you need to be with your purchase price on any given property you are thinking about buying for a fix and flip investment.
If you are just getting started with fix and flip investing, you may find it difficult to project all the renovation costs and final ARV. Consult with experts and do as much research as you can to avoid getting stuck with a losing investment.
Another factor you do have to consider is the market itself. This may change the 70% rule into a different desired percentage as the market dictates. You might set a lower percentage in a lower-end market (maybe 60-65%) where properties can be bought cheaper. On the other side of the coin, you may have to make that number higher in a high-end market where you probably aren’t going to get as good a deal on the house. Your target purchase price may need to be as much as 80-85% of the ARV minus renovation expenses in a luxury real estate market.
In the end, the 70% rule is just basic guide that can help you. It is not the only thing that you should use to figure out which properties are best to buy and which offer the most return on investment (ROI) potential. The more analytics you can run, the more confidence you will have as a real estate investor looking for good deals on great fix and flip properties.
Buyers who are members of the PropertyLark home buying network have access to our custom analytics. We thoroughly analyze each property and give you our expert projections. We identify what we feel are the best available houses (whether they are listed on the market or they are completely off-market transactions) and then share them exclusively with our investors. Apply today to see if you qualify to be a part of the elite PropertyLark buyers’ network!