In real estate, what is the 70% rule?
The 70 percent Rule is a real estate investing rule of thumb that can be used by property flippers to determine the maximum acquisition price of a fix and flip property based on the ARV. It effectively incorporates a 30% profit margin into the transaction.
When buying a house to fix and flip, you should not pay more than 70% of the after-repair value. Importantly, before deciding on the final offer price, you must deduct the repair charges. This question’s fundamental problem is how much you should spend for the property.
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The 70 percent rule works like this:
The Formula for the 70% Rule
Maximum Purchase Price = After Repair Value * 70% — Repair Costs Estimated
It’s vital to remember that in order to apply the 70 percent rule, you must first calculate the after-repair value. Consider it a two-step procedure.
Step 1: Using Comps, determine the property’s ARV (similar properties)
Step 2: Using the 70% guideline, determine the property’s maximum purchase price.
The Rule of 70% Example
The following example will show you how to use the 70% rule to calculate the maximum purchase price for an investment property. Let’s say you have a house in Savannah, Georgia with an after-repair value (ARV) of $380,200.
Property Details
- ARV = $380,2200
- Expected Renovation Costs: $41,500
ARV Formula
- Maximum price = ARV * 70% — Repair Costs
- Maximum price = $380,200 * 0.7 — $41,500
- Maximum price = $224,640
Based on the estimated ARV of $380,200 and the expected remodeling cost of $41,500 in the case above, the highest allowed offer would be $224,640
From a house flipping viewpoint, it’s vital to know that the 70 percent guideline use the ARV Formula to determine the property’s current value. The present owner of the house might have a different opinion, so you’ll have to haggle to get them to accept the highest bid that you’ve proposed.
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Before you commit to a house flipping endeavor, you should have a strong grip on the expected repair costs. If you overestimate the cost of repairs, the deal may not be profitable enough to move through with. Simultaneously, if you underestimate the renovation costs, you may develop a faulty perception of how much money you can make in the deal.
It should be obvious by now that calculating a property’s after-repair value is a crucial skill for fix-and-flip investors to master. The gold standard for estimating ARV is to use comparable sales of similar properties in close vicinity to your investment property.
Furthermore, it should be evident that in order to use the 70% rule to get a viable offer price for the property, you must first determine the ARV. That’s why these two methods are frequently combined to provide a comparative market analysis on an investment property.
