Mastering Fix and Flips With The 70% Rule

Real estate flipping can be a rewarding venture but simultaneously challenging. With all of the variables that can directly impact your flip on the micro scale and micro scale, it is essential to adopt a strategy when diving in. A common strategy used within the flipping domain is the 70% Rule. Let's jump into the core of this strategy and how you can use it to leverage your fix and flip journey.

Understanding House Flipping

In a nutshell, house flipping is the practice of purchasing a property at a discounted price (likely a distressed property), renovating it, and hopefully shortly after - selling it at a higher price to make a profit.

Introducing the 70% Rule

The 70% rule states that an investor should not purchase a property more than 70% of the property's After Repair Value (ARV) minus the repair costs. Note* The ARV is the estimated value of the property after the renovation.

Using the 70% Rule

Let's take a look at how to apply the 70% Rule.

Calculating ARV

The first step is to determine the ARV of the property. The ARV represents the potential sale price of the house once all renovation work is complete. This is the most crucial step because it directly impacts your purchase price and investment as a whole. Get in touch with your local realtor, study the market, analyze comparable sales to determine a realistic ARV.

Determine Repair Costs

Next, estimate the cost of renovation. This should include all renovation expenses necessary to make the house ready for sale on the market. Consult with your contractors to project accurate renovation costs.

Implementing the 70% Rule

Lastly, apply the 70% Rule. Multiply the ARV by 70% and subtract the renovation costs. The resulting figure is the maximum price you should consider buying the property for to ensure a profit when it is all said and done.

Example Fix and Flip

Suppose a property's ARV is $500,000, and the estimated renovation cost is $50,000. Applying the 70% rule goes like this:

1. $500,000 x .70 = $350,000

2. $350,000 - $50,000 = $300,000

If implementing the 70% rule, the maximum purchase price is $300,000.

Thinking Beyond the 70% Rule

While the 70% rule is a general guideline, there are still pitfalls. There are multiple factors that should be considered when determining your purchase price such as market conditions, closing costs, holding costs, and financing costs. Some examples of additional costs to be aware of are below:

Holding Costs - Property Tax, Insurance, Utilities, Interest Payments on a Loan.

Closing Costs - Broker Commissions, Title/Escrow Fees, Loan Origination Points.

DO NOT LET THESE COSTS SNEAK UP ON YOU AND EAT INTO YOUR PROFITS

Conclusion

While the 70% rule offers a straightforward way to estimate the maximum purchase price for a property, remember it is just a guideline. Seek professional advice from realtors, contractors, and other investors to ensure your on the right path to profits.

Check Out Our Free Fix and Flip Calculator and Short Tutorial to Get Started. Link and Video Below:

https://www.peakvestor.com/fix-n-flip