What is the 70% Rule?
The 70% rule states that an investor should pay no more than 70% of the ARV (after repaired value) of a property. This is a commonly used rule that investors use to judge whether or not a property is worth buying for a flip and how much they should offer for the property.
Example of what this means -
To give a better sense of what this means in practicality, we thought it would help to run through an example:
- A properties ARV is $200,000 and it needs an estimated $30,000 in repairs.
- The 70% rule states on this occasion, that an investor should pay $110,000.
- ($200,000 x 70%) - $30,000 = $110,000
On paper, this looks like a fantastic deal, however, you have to remember that there are a lot of associated costs that come with a fix and flip. We will explore a few of those costs later.
Should you use the 70% rule?
The 70% rule is a great way to get a quick estimate. However, it’s worth noting that it’s not the final number. In general, we use the 70% rule as a starting point, it’s a quick and easy sum to do to see if a deal is viable.
If the numbers work with the 70% rule we will normally do a deeper dive into the numbers and costings to get a more precise upper estimate for our purchase price.
Let’s break down what that would mean:
- $200k is the purchase price. And an estimated $30k in repairs are needed.
- In general, we would add an additional $5,000 for unknown costs which inevitably occur during a fix and flip.
- Selling the house will costs 5% commission plus title insurance and further closing fees which will all add up to an estimated $12,500.
- Then there are insurance, utilities, and yard maintenance whilst owning the property. These will cost a further estimated $4,000.
- Add to this the listing fees, property photography, and I might consider staging the property, these costs will add up to a conservative $1,500.
If we aim for a $25,000 - $35,000 profit for this flip which isn’t unreasonable, then the numbers look like this:
- $200,000 - $35,000 (desired profit) = $165,000
- Total estimated costs = $30,000 + $5,000 + $12,500 + $4,000 + $1,000 = $53,000
- $165,000 - Total Costs = $112,000
As you can see that comes out pretty close to the 70% rule.
These are all estimates, and on a real deal, we’d do extensive research into a property to determine as accurately as possible each of these numbers.