What is the 70% Rule in House Flipping?

House flipping is a real estate investment strategy where investors purchase a property, renovate it, and then sell it for a profit. To maximize returns and mitigate risks, investors often follow rules of thumb to guide their decisions. One such rule commonly used in house flipping is the "70% Rule." In this article, we'll explore what the 70% Rule is, how it's calculated, and its significance in the house flipping process.

Understanding the 70% Rule:

1. Definition:

• The 70% Rule is a guideline used by real estate investors to determine the maximum amount they should pay for a property based on its after-repair value (ARV) and estimated repair costs.

2. Formula:

• The formula for the 70% Rule is:

  Maximum Allowable Offer (MAO) = (ARV * 0.70) - Repair Costs

  Where:

  • MAO: Maximum Allowable Offer

  • ARV: After-Repair Value

3. Components:

• After-Repair Value (ARV):

  • This is the estimated value of the property after it has been renovated. It's crucial to accurately assess the potential resale value based on the local real estate market.

• Repair Costs:

  • Investors need to estimate the expenses required for renovating and improving the property. This includes both material and labor costs.

4. Significance:

• The 70% Rule is designed to leave a margin for unforeseen expenses, market fluctuations, and to ensure an adequate profit margin. It helps investors avoid overpaying for a property and increases the likelihood of a profitable outcome.

Applying the 70% Rule in House Flipping:

1. Research and Due Diligence:

• Investors need to thoroughly research the local real estate market, understand property values, and assess the demand for renovated homes.

2. Calculating ARV:

• Accurate ARV calculations are essential. Investors may consult real estate professionals, use comparative market analyses (CMAs), or employ appraisal services to determine the property's potential value after renovation.

3. Estimating Repair Costs:

• Detailed assessments of necessary repairs are critical. Investors may engage contractors or construction professionals to provide accurate estimates.

4. Flexibility:

• While the 70% Rule provides a general guideline, investors should remain flexible and consider variations based on the specific circumstances of each property.

5. Risk Management:

• The rule helps manage risks by building in a buffer for unexpected costs or changes in the market. This proactive approach enhances the chances of a profitable flip.

Conclusion

The 70% Rule serves as a valuable tool for house flippers, offering a systematic approach to property acquisition that aims to balance investment costs and potential profits. Investors should use it as a guideline, adjusting for unique property characteristics and local market conditions. By adhering to prudent financial principles, investors can enhance their success in the competitive world of house flipping.