Flipping houses is easily one of the most popular forms of real estate investment. While real estate investment was traditionally a long term investment, flipping houses has completely transformed this form of investment.
Allowing those who don’t want to be tied into long term investments to reap the benefits of real estate investment.
When it comes to flipping houses, one rule that you might have heard mentioned a lot is the “70% rule”. This is a rule that many people who flip houses follow, but what is the 70% rule when flipping houses?
And how can you implement it when flipping houses? Well those are good questions!
In this guide, I’ll be taking a look at the 70% real estate rule to tell you absolutely everything you need to know about this rule, and whether, or not, it is a good rule to implement when flipping houses. So, if you want to find out more, keep on reading!
What Is The 70% Rule When Flipping Houses?
First things first, let’s take a look at what the 70% rule is. As we have mentioned, this is a rule that many people who flip houses implement to help protect their investment.
The 70% rule is actually implemented before the purchase of a home, and it involves the amount that a buyer should pay for the home they plan to flip.
Essentially, the 70% rule allows flippers to determine the amount of money that they should spend on a house.
The rule states that a house buyer should pay no more than 70% of the home’s value after the repairs have been completed, minus the costs of the renovation.
This can be a little confusing but it basically ensures that those who purchase houses to flip will make a profit on the sale of the house.
When you invest in real estate through flipping houses, there is a lot of research involved. You will need to investigate the value of homes, and the potential resale value before diving into a purchase.
The 70% rule is just one way that you can help protect your investment. With that in mind, let’s take a look at how to calculate the 70% rule.
How Do You Calculate The 70% Rule?
While you will need to be fairly good with numbers to flip houses, the 70% rule is pretty simple and can be calculated even by those who struggle with numbers. In order to calculate the 70% rule, you will need to know the ARV of the house.
The “ARV” when flipping houses is the “after-repair value”. Of course, you will never be able to know the exact value of the home after the renovations have been completed, however this can be estimated.
There are lots of things that will help you calculate the ARV, including research into houses sold in the area, and the percentage of value that repairs that you do will add to the property.
Once you have found out the ARV, you simply multiply this number by 0.7 using a calculator. This will tell you what 70% of the ARV is. This calculation will provide you with the maximum amount that you should spend on purchasing the property.
If the house that you are flipping requires a lot of renovation work, then you will need to get an estimate of the costs for these renovations.
Once you have been flipping houses for a while, you will easily be able to calculate this based on your own knowledge. However, if you are new to flipping houses, it is a good idea to get your estimated renovation costs from a contractor.
When you have the estimated cost of the renovations, you simply minus this from the 70% calculation that you worked out earlier. This will give you the maximum amount that you should pay for the home.
For example, if you estimate that the ARV for the house is $400,000, then 70% of this will be $280,000. If the estimated cost of repair work is $50,000, then the maximum amount that you should pay for the property is $230,000.
Should You Use The 70% Rule?
Whether, or not you use the 70% rule is totally up to you. While this is a rule of thumb when flipping houses, there are many people who are very successful at flipping houses that completely ignore the 70% rule.
But if you are new to flipping houses, or like a format, then the 70% rule could work really well for you.
Generally speaking, the 70% rule is pretty accurate when implemented. As long as you get the estimations of cost and ARV correct, then the 70% rule really can help you ensure that you do not spend too much on a property that will not give you a decent profit.
From time to time, it is possible that you will not make as much money as you might expect when flipping a property. It is easy to miscalculate things, and there are often hidden obstacles in flipping houses that you might not have anticipated.
If you have to spend more on the renovations than you budgeted for then this will eat into your profit, however this is one of the risks involved with real estate investment.
Things You Should Know About the 70% Rule
There are a few things that you should know before you use the 70% rule when flipping houses. So let’s wrap this up by taking a look at what you should know about the 70% rule.
It Doesn’t Always Work
Even though the 70% rule is pretty accurate when it comes to calculating profits for flipping houses, it doesn’t always work.
There are some variables that could impact the effectiveness of the 70% rule. If the housing market crashes, then you could lose money on the property. Likewise, if there are hidden costs in the renovation, then this will also impact your profit.
However, both of these are risks that you will be fully aware of going into real estate investment, and most of the time, the 70% rule will work.
Your Offer May Not Get Accepted
Depending on the area that you are flipping houses in, and whether you are flipping in a buyer’s or seller’s market, there is a chance that your offer may not get accepted. Even when using the 70% rule.
This rule doesn’t always work, and there is always a risk that the seller will not accept the offer that you are putting in on the home. This is a lot more common when the housing market is hot.
The first time this happens, you might be happy to pass up on a home, rather than tweaking your calculations. But if this becomes a common issue, then you may have to tweak your numbers.
The 70% rule is always the best option, but you can increase this up to 85% if needed. However, you will need to be mindful of the impact this will have on your profits.
70% Real Estate Rule – Summary
In short, the 70% rule is a rule that is often implemented by those who flip houses. This rule helps you calculate how much you should pay for a house that you intend on flipping based on the value of the property and the cost of renovations.
Thanks for reading!
Frequently Asked Questions
How Do You Calculate the 70% Rule Quickly?
The great thing about the 70 percent rule is that it is super easy to calculate. All you need to do is take the after renovation value of the property (or an estimate of what this could be), and multiply it by 0.7.
This will tell you what 70% of the value is, allowing you to have a rough idea of how much you should pay for the property.
What Is Most Important When Flipping Houses?
There are lots of renovations associated with flipping houses, but which jobs are the most important when it comes to adding value to your property?
Two of the most important areas to focus on when flipping houses is the bathroom and the kitchen, as these areas are guaranteed to add value to your home.
How Many Houses Can You Flip In A Year?
If you are new to flipping houses, then it will typically take a while for you to pick up speed with flipping houses. Many people will take more than a year to flip their first house.
But as you do this more regularly, and pick up speed, you could end up flipping between 2 and 7 houses in a year. Depending on the property market, of course.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.