How Do You Use The 70% Rule?

The 70% Rule...it seems like everyone gets confused by this one when flipping houses...

Whether its people I meet at local meetups, Boot Camp attendees or people at local REIA meetings, they get confused all the time.

This "slightly older" video of yours truly, explains it:

[youtube width="600" height="422"]http://youtu.be/JpfnAMRj-2Y[/youtube]

In this video:

00:02  The magic words to say when approaching investors

00:20 What is ARV

00:51  Exceptions to the 70% rule

01:22  How to calculate the 70% rule

01:48  What your profit and expenses are in the 70% Rule

02:45  How to determine spread in a house flip

03:13 What to do when things go wrong

3:49 Real estate broker commission calculation

The 70% Rule Fundamentals

Here we use $200,000 as our ARV. There are plenty of comps in the area and you feel comfortable with that number.

So to get to the 70% Rule, you do the following:

1. Take the $200,000 and multiply it by 70%, which equals $140,000:

ARV: $200,000

70% Rule: $200,000 x .70 = $140,000

2. To get the maximum amount you should pay for the house, you then deduct your renovation costs from that $140,000. In this case, let’s say your rehab expenses will be $40,000:

Subtract the $40,000 from the $140,000:

Repair costs: $40,000

70% Rule: $140,000

Maximum Allowable Offer (MAO): $100,000

In this example, you’d make an offer below $100,000, then most likely negotiate up if you need more wiggle room. When all your costs come in as expected, you will make a nice profit on this flip no doubt.