FAQ
What is the 70% Rule for Flipping Houses?
Based upon years of experience, flippers developed a quick rule of thumb called the 70% Rule to help them quickly and roughly analyze the Maximum Purchase Price they should offer for a property.
The 70% Rule states that you should buy a property at 70% of the After Repair Value minus the Repair Costs.
Maximum Purchase Price = (After Repair Value * 70%) - Repair Costs
FAQ
Why Do house flippers use 70%?
In order to successfully flip houses you need to buy properties at a big enough discount to make a profit and cover all of the other 'Fixed Costs' (buying, holding, selling & financing costs).
When you multiply the After Repair Value by 70% you are discounting the property by 30% to cover your Profit and Fixed Costs.
Generally speaking, the 30% reduction is broken down as roughly 15% for your Profit and 15% for the Fixed Costs.
70% Rule Formula Example
A flipper finds a distressed property that a seller is asking $85,000 in a neighborhood with $200,000 resale values. Based upon your estimates you feel the property needs $65,000 in repairs.
What should the flipper offer based upon the 70% Rule?
Answer
Maximum Purchase Price = (After Repair Value * 70%) - Repair Costs
Maximum Purchase Price = ($200,000 * 70%) - $65,000
Maximum Purchase Price = $140,000 - $65,000
Maximum Purchase Price = $75,000
In this scenario, the seller is asking for $85,000 which is $10,000 more than the recommended purchase price of the 70% Rule
FAQ
Can you offer more than 70% for a property?
Reality check
Yes! You can offer more or less than the 70% Rule! In fact, you need to establish a % Rule that works best for you and your market!
It's important to remember that the 70% Rule is just a rule of thumb to help you quickly gauge whether a property is a good deal or not.
The 70% Rule will vary from investor-to-investor and market to market.
A Cash Investor that also has their Real Estate License can save money on expensive loan payments and save 3% commission on the sale, so they may be able to offer more aggressively at 75 to 80% of ARV. Whereas, an Investor that is using a Hard Money Lender and Real Estate Agent to sell their property, may need to buy the property at 65 to 75% of ARV to account for their higher 'Fixed Costs'.
Your real estate market will also affect the profit margins that you can make on your deals. In today's hot and competitive marketplace, and especially on the East and West Coasts many investors profit margins are shrinking from 15% of ARV down to 10%. In order to get deals many investors are offering more aggressively at 70% to 80% of ARV.
For this reason, it's important for you to customize YOUR OWN PERSONAL % that you will use for acquiring your deals in your real estate market.
How to Calculate Your Own % Rule
When you are first starting to analyze deals you should use the more detailed Maximum Purchase Price Formula approach to calculate all of the project costs on your projects.
Calculating all of the projects will require you to calculate all of the the Buying, Holding, Selling & Financing Costs on your projects and help you determine an accurate % that you can use for your '70% Rule'.
To calculate your own % you can use the following formula:
Purchase Percentage = 1 - ((Buying Costs + Holding Costs + Selling Costs + Financing Costs + Profit) / After Repair Value)
Let's use the Detailed Maximum Purchase Price Example above:
Calculating Your Own % Rule Example
A flipper finds a distressed property that the seller is asking $85,000 in a neighborhood with $200,000 resale values. After performing a detailed analysis of all of the project costs the flipper calculates the following costs:
- Repair Costs = $65,000
- Buying Costs = $2,000
- Holding Costs = $3,750
- Selling Costs = $16,000
- Financing Costs = $7,500
- Desired Profit = $30,000
What is the flippers purchase % of the ARV?
Answer
Purchase Percentage = 1 - ((Buying Costs + Holding Costs + Selling Costs + Financing Costs + Profit) / After Repair Value)
Purchase % = 1 - (($2,000 - $3,750 - $16,000 - $7,500 - $30,000) / $200,000)
Purchase % = 1 - ($59,250 / $200,000)Purchase % = 1 - .29625
Purchase % = 70.375%
In this scenario, our purchase % is right at 70% of the After Repair Value.
TAKEACTION
Now that you have calculated your own % Rule, start analyzing deals in your marketplace. The more you practice, the better you'll get at quickly determining the value of a property.
FAQs
Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.
How do you calculate a 70% rule? ›
When buying a home to flip, investors need to estimate how much they believe the property could sell for after it's been renovated. They can then multiply that amount by 70% and subtract it from the estimated cost of renovating the property.
How to calculate flipping a house? ›
70% Rule Formula
Based upon years of experience, flippers developed a quick rule of thumb called the 70% Rule to help them quickly evaluate the value of a potential flip property. The 70% Rule states that you should buy a property at 70% of the After Repair Value minus the repair costs.
What is the Brrrr method 70 rule? ›
This rule states that the most an investor should pay for a property is 70% of the After Repair Value minus the estimated rehab cost. The idea is that the remaining 30% will cover the real estate commission, closing costs and so forth while still leaving a healthy profit.
What is the flip rule? ›
If you plan to purchase a flipped home with an FHA loan, you must abide by the FHA 90-day flipping rule. This rule states that a person selling a flipped home must own the home for more than 90 days before home buyers can purchase the property.
What is the 70% rule in flipping? ›
Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.
What is the golden formula for real estate? ›
In case you haven't heard of the so-called Golden Rule in house flipping, the 70% Rule states that your offer on a property should be no greater than 70% of the After Repair Value (ARV) minus the estimated repairs.
What is a flip calculator? ›
This calculator gives you a basic overview of what you should pay for a flip based on the repairs needed and the ARV (after repaired value). The calculator is based on the 70 percent rule, which is very close to what I pay for most of my flips.
What is the fix and flip formula? ›
To use the 70% Rule, you need to know the After Repair Value (ARV) of the investment property that you are hoping to flip. Once you have the ARV, you will simply multiply it by 70% and then deduct the expected rehab costs. The number that you're left with is the maximum price that you should pay for the house.
How to calculate profit on a flip house? ›
The Calculation Process
- Add up all the costs mentioned above. This will give you the total investment in the property.
- After selling the property, deduct these total costs from the final selling price of the house.
- The remaining amount is your profit from the real estate flip.
The 70% rule in house flipping recommends that real estate investors only pay up to 70% of a house's after-repair value (ARV) to make a profit from flipping the property. To get the maximum sale price of a potential flip, subtract the total repair costs from its after-repair value.
What is the 1 rule in real estate? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
What is the Rule of 72 in real estate? ›
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.
What is illegal flipping? ›
This is how they work: A con artist buys a property with the intent to re-sell it an artificially inflated price for a considerable profit, even though they only make minor improvements to it.
How to flip houses for beginners? ›
How To Start Flipping Houses
- Research The Market. The first step toward serious house flipping is knowing the housing market. ...
- Understand Neighborhood Rankings. ...
- Secure Your Finances. ...
- Get Expert Counsel. ...
- Find And Buy A House. ...
- Sell For A Profit.
Part 2 - The 91-180 day flip rule
It states that if there sale date of the property falls between 91-180 days following the seller's acquisition of the property, AND if the property is being sold for 100% or more over the price paid by the seller to acquire it, then a second appraisal of the home is required.
What is the Rule of 72 and how do you calculate using this rule? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
What is the Rule of 72 what formula is used to calculate this amount? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the difference between the rule of 70 and the Rule of 72? ›
The rule of 72 is best for annual interest rates. On the other hand, the rule of 70 is better for semi-annual compounding. For example, let's suppose you have an investment that has a 4% interest rate compounded semi-annually or twice a year. According to the rule of 72, you'll get 72 / 4 = 18 years.
