What Is The 70% Rule In House Flipping?
House flipping is a popular and potentially lucrative way to invest in real estate. However, it's also a complex and challenging process that requires careful planning and financial management. One of the most important principles that house flippers need to understand is the 70% rule. In this article, we'll take a closer look at what the 70% rule is and how it can help you make smart investment decisions.
The 70% rule is a guideline that helps real estate investors determine the maximum price they should pay for a property in order to make a profit when flipping it. The rule states that an investor should pay no more than 70% of the after-repair value (ARV) of the property, minus the cost of repairs and other expenses. The 70% rule is based on the idea that a successful house flipper should aim to make a profit of at least 30% on their investment.
For example, let's say that a house has an ARV of $300,000 and requires $50,000 in repairs and other expenses. To apply the 70% rule, the investor would multiply the ARV by 70%, which equals $210,000. Then, they would subtract the cost of repairs and other expenses ($50,000) from this amount to get the maximum purchase price of $160,000.
Using the 70% rule can help house flippers avoid overpaying for a property and ensure that they have enough room to make a profit. However, it's important to keep in mind that the 70% rule is just a guideline and not a hard-and-fast rule. Each property and market is different, and it's essential to do your due diligence and carefully evaluate all of the factors that could impact the success of a house flip.
One of the key factors to consider when using the 70% rule is the cost of repairs and renovations. It's important to have a clear understanding of the work that needs to be done on the property and the estimated cost of those repairs. This will help you accurately calculate the after-repair value of the property and determine if it's a worthwhile investment.
Another important consideration is the location of the property. The 70% rule is just a starting point, and it's essential to take into account the local real estate market and the demand for properties in that area. A property that meets the 70% rule in one market may not be a good investment in another.
In addition to the 70% rule, there are other strategies that house flippers can use to maximize their profits. For example, some investors use the "80% rule," which involves paying no more than 80% of the ARV, minus repairs and expenses. Others use the "flip formula," which involves multiplying the ARV by a factor of 0.7 or 0.8, depending on the condition of the property.
Ultimately, the key to success in house flipping is to do your research, crunch the numbers, and make informed decisions based on your own goals and financial situation. Whether you're a seasoned investor or just starting out, the 70% rule can be a valuable tool for making smart investment decisions and maximizing your returns.
In conclusion, the 70% rule is a key principle that every house flipper should understand. It can help you avoid overpaying for a property, ensure that you have enough room to make a profit, and make smart investment decisions based on the local market and your own financial goals. While the 70% rule is just one of many strategies that can be used in house flipping, it's a powerful tool that can help you build a successful and profitable real estate portfolio.
