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What Is The 70% Rule In House Flipping?

Cathie Ericson5-Minute Read
December 17, 2021

If you’re getting ready to take the plunge and buy an investment property, your main concern might be deciding how much to offer. When buying a fixer-upper, you don’t want to overpay and cut into your profit margin. Most house flippers begin their analysis with the 70% rule.

In this article, we’ll show you how to use this rule to help you set your offer price.

What Is The 70% Rule In Real Estate?

If you’re getting ready to take the plunge and buy an investment property, your main concern might be deciding how much to offer. When buying a fixer-upper, you don’t want to overpay and cut into your profit margin. Most house flippers begin their analysis with the 70% rule.

In this article, we’ll show you how to use this rule to help you set your offer price.

How Does The 70% Rule Of After Repair Value (ARV) Work?

The after repair value of a home is a projection – made at the time of purchase – of how much the home will be worth when you’ve completed repairs and are ready to resell.

It’s important to understand that there’s always an element of risk involved, because you can never be certain what the market will be like when that time comes.

The 70% rule applies to the total amount you'll be spending on the property: its initial purchase, the cost of buying the home, ownership costs (typically your monthly mortgage payments including escrow payments), cost of planned repairs and costs of selling the property.

Of course, this is just a rule of thumb, and yet it is remarkably useful in its simplicity as a way to confirm that you’ll get the most value out of the property without overpaying or over improving.

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The 70% Rule: How To Calculate How Much House Flippers Should Pay

When you purchase an investment property, your primary focus is on making sure you maximize the return on that investment. But balancing potential resale price against the cost of the repairs is crucial to determining how risky the investment is.

Know Your Market To Estimate Resale Cost

First you want to make sure you’re not overpaying for the market, so you should do your research and arrive at a price that’s based on comparative real estate values, which are nearby properties that have similar characteristics to your target. Of course, it’s impossible to know with certainty how much the property will cost when you’re ready to resell, so make sure your estimate is conservative. Even the hottest of seller’s markets can suddenly catch a chill and turn into a buyer’s market.

Know How To Estimate How Much Repairs Will Cost

Next, you’ll want to determine which repairs need to be done. This is a good time to involve a contractor and/or interior designer if cosmetic improvements will really help it shine. You want to make sure that your estimate is accurate, based on the cost of materials as well as workmanship.

Know Your Exit Strategy And Stick To Your Plan

Go into your investment with a plan to either flip the house, own it as a rental property or hold it for anticipated appreciation while continuing to rent the property in its current condition. If you’re not planning on making substantial improvements but are planning to rent it out, make sure the property currently meets building and safety code standards before assuming ownership.

Pad Your Cost Estimates

You should always assume that repairs will cost more than you think they will so that you can realistically project your profits. Some investors pad their cost estimates by as much as 20% to make sure they’re covered without wiping out profits. If you’re handy, your sweat equity can help keep costs down – but make sure to account for the time of your labor.

Don’t Overdo The Repairs

When figuring out what you’ll need to do to make the property achieve the best sales price, it’s important to have a firm understanding of the typical conditions and features of homes that seem to sell for a premium. You won’t want to overspend on renovations that won’t be recouped when you sell.

Do The Math

Let’s assume homes where you’re interested in buying typically sell for $300,000 if they’re in good repair. You’ve found a home that will require $50,000 of repairs to bring it up to the standards typical in the neighborhood.

Let’s also assume your closing costs as a buyer will cost you about $10,000, and that your ownership costs – property taxes, homeowners insurance and mortgage costs – will come to another $10,000 while repairs are being conducted through closing. You’ll have to pay $21,000 – the real estate agents’ commissions, which are typically 7% of the sales price – when you sell the home at $300,000.

Finally, calculate the minimum amount of profit that would make this undertaking worthwhile. You can add up the labor costs for the hours you put into rehabbing the home, or you can consider how much appreciation in value you’re looking to achieve. Let’s assume you want to earn at least $10,000 from the project.  

Step 1: Calculate 70% Of ARV

To calculate 70% of ARV: Multiply $300,000 by 70% to get $210,000.

70% of ARV = $210,000

Step 2: Subtract Costs

70% of ARV − cost of repairs − costs of home purchase − costs of ownership − cost of reselling − minimum acceptable profit = the maximum investors should pay for the property

Or, in this case:

$210,000 − $50,000 − $10,000 − $10,000 − $21,000 − $25,000 = $94,000

The 70% rule states that you should offer no more than $94,000 for this property.

Who Should Use The 70% Rule?

The 70% rule is most applicable when purchasing property as an investment. That's because when you buy a house as a primary residence, you are likely to hold it as an asset long enough to recoup the value that comes with market growth over the long term.

However, if you're planning to sell it quickly as a flipper or have it exclusively for real estate investing purposes, it's more important to be clear on how much you're sinking into the house in order to turn a larger profit on the investment as an asset.

Need a real estate agent?

Match with a local expert.

The 70% Rule Helps You Predict Profits But Doesn’t Guarantee Them

While the 70% rule is a great place to start when estimating what you should pay for a property, you should remember that it’s just a tool, not a guarantee of profit. While there’s an element of risk in all investments, learning all you can about how to invest in real estate will help you avoid some common pitfalls.

Any number of factors can affect a real estate purchase, such as those pesky unexpected costs – that’s why you pad your cost estimates – or other external factors, like markets that suddenly cool in response to an economic shock, like a sudden interest rate spike.

Before you make any real estate investment, you should be clear on all the different ways costs can vary and prepare to work those surprises into your budget.

The Bottom Line: The 70% Rule Helps House Flippers Calculate How Much To Pay For Their Real Estate Investments

Real estate can be a lucrative way to invest your money, but only if you’re able to recoup your profit. Using the 70% rule as a guideline can be a useful starting point for deciding how much to  offer on an investment property.

Ready to flip your first investment property? Learn everything you need to know.

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.