The 70 % Rule in House Flipping:
All real estate investors that are flipping houses want to maximize their return on investment, and many follow the 70% rule. The 70% rule means that an investor should pay no more than 70% of the after-repair value (ARV) of a property, less the cost of necessary repairs. An example of this would be a home’s ARV is $200,000 and it needs $40,000 in repairs. The 70% rule applied here means that the real estate investor should pay a maximum of $200,000 x 0.70= 140,000 – $40,000 = $100,000. This number does not include other fees associated with house flipping and does not mean that the remaining 30% is a locked in profit. That is often far from the reality as experienced investors know all too well. Here is a calculator to help as well.
Many real estate investors opt to use private financing (including hard money) as a business strategy in order to grow their portfolios, flip more often, and to generate a greater return on equity for their investments.
As a real estate investor, you will also want to consider interest and lender fees, factoring them into your profit margins. You want to make sure that you are working with a lender that is transparent and up-front about all costs, so you don’t have any surprises.
The 70% Rule is a good tool to use when analyzing a potential flip, but keep in mind it’s not the only tool you will need. It is merely a barometer to gauge the potential viability of an investment opportunity and help avoid over-paying for a property.
Choosing the Right Hard Money Lender is important as well and don’t forget to consider the 4cs of finding a lender—Cost, Capital, Credibility, Certainty. To learn more about the 4Cs of choosing a lender read more here.