What Is The 70% Rule In House Flipping? A Guide For Investors

Flipping homes can be an excellent way to make money in real estate. However, it’s a lot of work, and it’s important to make sure the project is worth your time and money in the end. That’s where the 70% rule comes in.

The 70% rule in house flipping is a rule of thumb that flippers use to decide whether to move forward with a particular investment opportunity.

Of course, it’s not the only thing to consider when deciding whether to buy a home to flip. It’s also not always a perfect tool since you may not know your exact costs ahead of time. But the 70% rule can be a great guideline.

What Is The 70% Rule In House Flipping?

The 70% rule in house flipping recommends that real estate investors only pay up to 70% of a house’s after-repair value (ARV) to make a profit from flipping the property. To get the maximum sale price of a potential flip, subtract the total repair costs from its after-repair value.

This rule, which is widely used in the real estate industry among those who flip homes, helps investors identify which projects are really worth their time and effort. After all, anything above and beyond 70% further cuts into your profit margin.

How To Calculate The 70% Rule In A Real Estate Transaction: An Example

The 70% rule can be an excellent guideline to ensure you take on only those flipping projects that will be worth it financially. Here’s how to run the numbers:

1. Find A Flippable Property

The first step in calculating the 70% rule is finding a property you’re interested in. A flippable property is one that is distressed or needs a lot of renovations but that you could significantly increase the value of with the right repairs.

When making this type of real estate investment, it’s important to remember the goal is to fix up the home and sell it for a large profit. If the home can’t be salvaged or, on the other hand, doesn’t actually need that much work, it may not be the right choice for a flip.

2. Estimate Renovation Costs

The next step – and perhaps the most important step – of calculating the 70% rule is estimating your renovation costs. Your costs might include:

• Home buying fees
• Payments on loans for flipping houses, plus interest
• Closing costs
• Cost of labor and materials
• Costs of selling a house

Unfortunately, this step isn’t a perfect science. It’s often the case that you don’t know with certainty how much your renovations will cost. The best you can do is make a good estimate.

3. Determine After-Repair Value

Once you’ve planned out what repairs you’ll make to the home, you can calculate its after-repair value (ARV). You can calculate the ARV of the home by adding the original purchase price and the value added from the renovations.

There’s no easy formula to help you determine the ARV. It depends largely on where you live. You can often determine an ARV by looking at comparable properties in the area (aka comps) and comparing their condition, size, number of rooms, locations and other factors.

If you don’t feel confident determining the ARV of a home yourself, consider enlisting the help of a real estate agent who can look at the comps and help you settle on a value.

Of course, the housing market can change rapidly. Depending on how long it takes you to renovate the home, the ARV might be different when you finish the project from when you started it. However, having a good estimate upfront is important to see if the property meets the 70% rule.

4. Plug Into The Formula

Once you know the cost of the property, the cost of the renovations, and the estimated ARV, you can run the numbers to see if it falls within the 70% rule.

Here’s what that formula looks like:

(After Repair Value x 0.7) - Estimated Repair Costs = Maximum Purchase Price

Let’s use an example to make the formula a bit easier to understand. Let’s say you’re considering buying a property to flip. You know you could sell the home for an ARV of about $400,000. However, you also know it needs about $75,000 of work to bring it there.

First, you would calculate 70% of the ARV of $400,000, which comes to $280,000. Next, you would subtract the estimated repair costs of $75,000, which comes to $205,000. Based on the 70% calculation, $205,000 is the most you could pay for the home and still meet the 70% rule.

If you could purchase the property for $205,000 and stick to the estimated repair costs, you would profit about $120,000.

How Accurate Is The 70% Rule In Real Estate?

While the 70% rule is a great place to start when estimating what you should pay for a property, you should also remember that it’s just a tool, not a guarantee of profit.

Any number of factors can affect a real estate purchase. First, it’s possible your estimated repair costs won’t be what you thought they would be. When running the 70% calculation, it’s best to pad your repair costs to leave room for unforeseen costs.

Next, you can’t know for certain what the real estate market will look like when it’s time to sell the home. The market could suddenly cool down in response to an economic shock, like a sudden interest rate spike. Suddenly you aren’t able to sell the home for what you originally thought you could.

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. And while there’s an element of risk in all investments, learning all you can about how to invest in real estate can help you avoid some common pitfalls.

Tips To Keep In Mind When Using The 70% Rule For House Flipping

This article makes it sound like a simple process to determine whether to invest in a particular flip project. But there’s actually a lot that goes into it. Here are some things to keep in mind when using the 70% rule for house flipping.

• Overestimate your costs: As we mentioned, repair costs can easily exceed your estimates. After all, you won’t know the full extent of the repairs needed until you get started.
• Understand the current market: Understanding current real estate trends is a critical part of flipping homes. You must know what buyers are looking for in homes today, as well as how much certain repairs are likely to increase the home’s value.
• Use a comparative market analysis: Estimating a home’s ARV can be a complex process and depends largely on where you live. When estimating your ARV, run a comparative market analysis (CMA) that uses comparable homes in the area.
• Don’t over-renovate: The goal of flipping a home is to maximize your profits. It’s possible to put too much money into the home and make too many repairs to the point where you no longer get as big of a return. While it’s a difficult estimation to make, try to find the amount of repairs that gives you the highest profit margin.
• Get approved: Unless you have an established real estate business with a large amount of capital, you’ll probably have to finance your flip projects. It’s best to apply for mortgage approval early so you know how much you’ll be approved for and at what interest rate.

70% Rule In Real Estate: FAQs

Are you considering flipping homes? Here are answers to some of the most asked questions about the 70% rule.

When shouldn’t I use the 70% rule in real estate?

The 70% rule is a great rule of thumb when you’re flipping homes but may not be appropriate for other types of investments. Other forms of real estate investing, such as buying rental properties, have their own calculations to help you determine the value of an investment.

What are the risks of using the 70% rule?

When you use the 70% rule, you always run the risk of your numbers being off. Your actual repair costs could drastically exceed your estimated costs. Likewise, your actual after-repair value may be far lower than you anticipated.

Who should use the 70% rule in real estate?

The 70% rule is most applicable to someone purchasing a house to flip. It can help you determine how much you can afford to pay for a home and whether the project will ultimately be worth it.

How can I maximize a house’s ARV?

You can maximize a house’s ARV by making the right repairs. First, consider what buyers are looking for in homes today. Those renovations may give you the most bang for your buck. Additionally, make sure to avoid doing too many repairs. Eventually, you may reach the point where additional repairs lower your profit margin rather than raise it.

The Bottom Line

Flipping homes can be an excellent way to make money from real estate, whether you’re just getting started in the industry or have many years of real estate investing under your belt.

One of the most important steps of house flipping is making sure you have the capital to buy the home. To determine how much you might be able to afford, start the approval process with Rocket Mortgage^®.