What is the 70% Rule in House Flipping?

The 70% rule in house flipping or real estate investing applies to how much you’re willing to spend on a house, which is obviously an important factor in any purchase! When you’re going to be renovating a property, the purchase price is extra important because you’re having to consider all of the repairs and rehabbing you’re going to be doing in order to flip that home.

One of the most popular ways, among house flippers, to calculate that purchase price for a home is the 70% rule. We’ll show you how to calculate it, and when it’s a great method to employ, and when it’s not. Read on!

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Jump To…

What is the 70% Rule?
When Should You Use the 70% Rule?
When Shouldn’t You Use the 70% Rule?
How to Calculate the 70% Rule
What Else Should You Consider?

What is the 70% Rule?

This rule states that the investor shouldn’t spend anything over 70% of a property’s ARV (After Repair Value) on a home. As you’ve seen in other blog posts, the ARV is an important number to know as a potential investor. That’s how you figure out if you can make a profit! You can read more on the all important ARV and some beginner house flipping tips here.

The ARV is an estimate of the property’s value when all repairs and upgrades to the property are complete, and you’re ready to put it back on the market. This includes the price you pay for the property, as well as the estimated repair costs.

The 70% rule isn’t the end-all, be-all when it comes to calculating how much you should pay for a rental property, but it’s a great place to start and gives you a great general picture of the property – that’s likely why it’s such a popular method. We’ll talk about the other factors to consider in the next section.

This method centers on the idea that by cutting out 30% of the purchase price, this will leave enough room for both your expenses and a profit. Its effectiveness lies in its simplicity. It allows you to ignore all of the other noise and details, and just focus on the two most important numbers in flipping a house: the ARV (what your property value will be) and the repair costs. Once you’ve estimated your ARV, you can work backwards to determine your offer price using the 70% method, or another method you prefer.

As you can imagine, the 70% rule is a great guideline and helps you to understand costs associated with the potential property, but 30% of the price leaving room for profit and expenses is not going to cut it in all markets. That brings us to…

When Should You Use the 70% Rule?

The 70% rule is a great beginning guideline to get a quick idea of an offer price on a property. However, you’re going to want to make sure you have an accurate idea of what’s realistic for pricing in that area for the property you’re looking at. Sometimes 70% just won’t cut it to make the deal. 

Additionally, you may need to make more or less repairs depending on the property. Consider the condition the property is in. If it’s in shambles, you may be better off with a 60% ARV offer. If the property just needs a little cosmetic work, maybe an 80% ARV offer fits the bill. In short, understand the property’s condition and the cost of repairs it will take to get it up to its maximum ARV.

When Shouldn’t You Use the 70% Rule?

As we mentioned before, the 70% rule is a great starting point and is good to use in any situation where you’re considering purchasing an investment property. However, you’ll want to go more in depth than just this initial number.

After you’ve established what your offer would need to be based on the 70% rule and the expected value of the property after repairs and renovation, you’ll need to add up any potential repair and upgrade costs. This is where you determine if there’s any profit to be made based on what the home will be worth and what all actually needs to be done to get it up to par.

How Do You Calculate the 70% Rule?

Calculating the 70% rule is super simple: just multiply the property’s ARV (After Repair Value) by 0.7 to determine the maximum price you should pay for that property. 

For example, if the ARV on a property you’re considering is $400,000, that means using the 70% rule, you’d be looking to spend no more than $280,000 on the property. You’ll then need to calculate what repairs and upgrades will cost you  to make sure you can make a profit. Check out this post on how to get started flipping houses, and what mistakes to avoid.

What Else Should Be Considered?

After you’ve used the 70% rule, it’s time for a more detailed analysis. After all, we’re not looking to be irresponsible with our investment! You’ll want to include additional expense estimates to paint a more accurate picture of what you’ll need to expect, here are a few to consider:

  • Financing costs
  • Title & closing costs
  • Carrying costs
  • “Just-in-case” budget for unforeseen repair costs

Exit Strategy

You’ll want to consider what you’re hoping to get out of the home investment. Are you looking to flip it quickly for a profit? Are you thinking about a long-term rental property or do you want to renovate it, rent it out for a couple of years and then sell it? Goals are an important thing to determine before you use the 70% rule. 

If you’re looking to have a rental property and your goal is cash-flow, rather than a one-time payout like you would in a flipping situation, then you may be willing to go higher than the 70% rule, and offer 80-90% of the ARV. This is especially true if repairs and upgrades are minimal, or you don’t plan on renovating until closer to the future selling date (for those longer term investments).

Just note that the longer you plan to hold the property, the more difficult it is to determine ARV, because you don’t know how the market is going to change over years of time. But you can at least usually get a sense of the direction it’s going based on current market conditions and looking at the last 2-5 years of growth. 

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