The 70 Percent Rule And Why It Is So Important When Flipping a Home
If you are planning on investing in real estate and want to fix and flip a home in order to make a profit, chances are people are going to be telling you all types of things and giving you all types of tips on what you should do and how you should do it. Some of these tips will be great—others, not so much, but one of the many “rules” you will likely hear when it comes to making a profit with your investments is the “70 Percent Rule.”
This is one of the most important and universally agreed upon rules when it comes to fixing and flipping a property?
So, what is the 70 percent rule when applied to fix and flip properties and how can you use it to your advantage?
The 70 percent rule states that an investor should pay 70 percent of the ARV, or the After Repair Value, of a property, minus the repairs needed to get the home ready to sell. This ARV is what the home is worth after it is fully repaired and ready to be sold.
So, for example if a home’s ARV is $300,000 and it needs $50,000 in repairs, then the most you should pay for the home is $160,000. Sure, it may seem as though buying a house that cheap means that you are going to make a huge profit, but after you go through closing costs, unexpected expenses (and there will be some), staging and every other cost that unexpectedly comes your way—you want to have this much potential profit margin to make sure you even end up making money at all.
It can be so tempting to try and “cut it close” when buying a house to fix and flip, but if you are new at fixing and flipping and don’t really know what you are doing, you are going to be really happy you kept to this rule. Otherwise, you can end up losing money on your first flip and ending your fixing and flipping career before it ever really gets off the ground.
Remember, if you want to make sure you are making a small amount or breaking even on these first few fix and flips so that you have enough money to keep your efforts going and to keep fixing and flipping properties moving forward.
Keep the 70 percent rule in mind and do your math before you decide to invest in a property. Keeping this rule in mind as you make your financial decisions will only help you get off on the right foot when investing in any property that comes your way.