House Flippers: Why 70 Percent is an Important Number to Know

Whether you are brand new to house flipping or have been in the real estate investment world for awhile, you’ve likely heard of the 70 percent rule (70% rule). It is a very simple formula that house flippers can use to determine their maximum purchase price for distressed properties. This number of 70 percent gives you a good target point to help ensure profitability, while also leaving a little wiggle room for unexpected issues.

The 70 percent rule is fairly simple to understand. It will require some careful property analytics and fairly accurate estimations if you want to produce the best results.

What is the Estimated Resale Value?

First, you will want to calculate and estimate the “after-repair value” (ARV) of any investment property you are thinking about buying. This refers to the minimum estimated selling price of the house once it has been renovated. You can use comparable homes in the neighborhood, recent sales data and other criteria to help you determine the projected selling price for a given property. It is wise to be conservative in your estimates and consider the lower range of your estimated selling price as your ARV. Never assume you will get top dollar for any property. Just consider it a great bonus if you sell for a higher price than your lowest estimate!

How Much Will it Cost to Renovate?

Second, you will need to project the repair and renovation costs for the property. Again, this will require some detailed analytics. Understand the cost of building materials, the time and labor involved, and other factors that will affect your overall renovation budget. Again, be conservative here. This time, however, you will want to focus on the higher end of your estimated renovation cost range. Build in some cushion in terms of time and expenses.

How to Calculate the 70 Percent Rule

Once you have these two estimates figured out, the 70 percent rule calculation is very easy. Take the estimated ARV of the house and multiply that by 70% (ARV x .7). Take this total and subtract your estimated renovation cost (ERC). The final result will be the maximum purchase price for the property.

(ARV x .7) – ERC = Maximum Purchase Price

Understanding the Numbers

In other words, the total you get after applying the 70 percent rule is the most you will want to pay in order to purchase the property. Let’s say you are looking at a house flip investment and you estimate the low range of the after-repair value to be $500,000. 70% of that is $350,000. Your renovation costs for the property are projected to be $50,000. That leaves you with $300,000 ($350,000 – $50,000) as your maximum purchase price.

If everything goes as planned in this scenario, your minimum profit should be 30% of the ARV. That equates to $150,000 and a very successful house flip. Because you’ve already built in some wiggle room with your estimates, the profit could be even more if your renovation comes in under budget or you get a higher selling price. The key is using the 70 percent rule to ensure a certain amount of profitability.

The 70 percent number is a good rule of thumb used by many real estate investors. For some flipping many properties in a year, the percentage may be higher because they are making more profit through quantity. For those flipping only one house a year, the percentage may be lower because your total income may be determined by one property sale. It’s important to find the percentage that works best for you and your business structure.

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