The 70% rule is a popular strategy for house flippers, and for good reason. Essentially, it states that you should try to purchase an unrepaired property for no more than 70% of its after-repair value (ARV), which is the likely sale price after all necessary repairs have been completed. This may seem strict at first, but it’s designed to ensure that you have enough room in your budget to cover repairs, holding costs, and other expenses while still making a healthy profit. To break it down further, here are some key points to keep in mind when using the 70% rule:
Calculate the ARV: Before you can apply the 70% rule, you need to have a realistic estimate of what the property will sell for once it’s repaired. Look at comparable sales in the area and factor in any unique features or upgrades that your property will have.
Deduct repair costs: Once you have an ARV in mind, subtract the estimated costs of repairs, including materials and labor. This will give you a rough idea of what you can realistically afford to pay for the property.
Account for other expenses: Remember that there are additional costs associated with flipping a house, such as financing fees, holding costs (such as utilities and taxes), and real estate commissions. These can add up quickly, so be sure to factor them into your budget before making an offer.
Overall, the 70% rule is a useful guideline for determining whether a potential house flip is worth pursuing. By limiting your purchase price to 70% of the ARV, you can help ensure that you have enough room in your budget to cover repairs, unexpected expenses, and still make a profit when it comes time to sell.