What’s the 70% Rule in House Flipping?
The point of flipping houses is to make a profit, ultimately. There is a lot of knowledge and skill involved in finding homes for a low enough price that allows for making the big bucks when it comes time to sell them after putting additional dollars into rehab.
Seasoned flippers understand important home flipping tips. The main rule of thumb is referred to as the house flipping 70% rule. Here’s how it works.
The house flipping 70% rule is more of a guideline and tends to work out well, especially when you plan on flipping the home fairly quickly.
Simply put, the 70% rule says that investors should pay no more than 70% of the property’s after-repair value, ARV, minus the cost of the repairs necessary to renovate. The ARV is the amount that the home could sell for after renovations.
The math works something like this three-step rule:
- When considering a property, estimate how much it will sell for after renovations.
- Multiply the amount by 70%.
- Subtract this number from the estimated renovation costs.
The calculation looks like this:
After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price
The final amount is the highest initial price to consider paying for the property.
For instance, using an ARV of $200,000, multiply by 0.7 to get $140,000. Now, subtract the expected cost of renovation and repairs. Say you have an estimate of $40,000 in renovation costs. Subtract $40,000 from $140,000. This leaves you with a $100,000 figure. This $100,000 figure is the estimated maximum price you should consider spending on buying the home.
Of course, before putting down money, you will also need to study market conditions. Meet with real estate professionals and contractors to get a realistic idea of all costs.
Another obstacle is that the seller rejects your 70% offer, which often happens in a seller’s market. If the market is hot, you must be flexible with the 70% rule. Some claim that going as high as 85% will still rake in a profit given the market is hot and fast moving.
House flipping always involves taking some amount of risk. However, understanding home flipping tips is helpful.
The bottom line cost is often more than the initial estimates when any renovation is involved. Always plan for the worst-case scenario, and be conservative when calculating repair costs. Additionally, a lot can happen with the market during the time it takes to get the house ready. Always anticipate every possible scenario.
Get the most accurate renovation estimate by working with a qualified contractor. RN Home Improvements and Repair is your go-to contractor. We repair and remodel everything from bathrooms, sun-rooms, drywall, and general carpentry to windows, siding, doors, walkways, flooring patios, foundations, sheds, and garages.
Here at RN Home Improvements and Repair, we are fully committed to customer service and will complete your job on time and within budget.
Give us a call today and remember: big or small, we do it all!
Categorised in: Home Remodeling