I'veÂ recently had a ton of questions from readers of this blog on how to flip houses when the 70% Rule may not apply to their market.
It may not apply exactly...but it does apply...even in expensive markets.
As you may recall, the 70% Rule is a standard benchmark used to determine how to do our house flipping math.
So let's get right into it and see if we can answer these questions...
How to Flip Houses: The 70% Rule Review
As you may recall, the 70% rule keeps you out of trouble when you're flipping houses. It also prevents you from doing "eraser math" when you're evaluating how to flip houses. I see lots of different ways to evaluate a property, but the 70% rule is the rule that I've always stuck with because although it does not exactly apply in every circumstance, it is an excellent benchmark to use to keep you honest and ensure a good profit on the property.
So for example, you've determined that the after repair value of a certain house is $200,000.
There are several comps in the area in the past six months that indicate that $200,000 is a fair price. These recent sales give you a good benchmark to begin your math.
Here's a video which explains the 70% Rule even further,Â just click here.
70% Rule Math
1.You take the $200,000 and multiply it by 70%, which equals $140,000:
70% rule: $200,000 x .70 = $140,000
2. Deduct your repair costs from that $140,000. Your rehab expenses will be $40,000, according to your contractor.
Now using the 70% rule, subtract the $40,000 from the $140,000:
Repair costs = $40,000
70% rule = $140,000
The maximum price you want to pay for this house is $100,000:
Maximum purchase price = $100,000
However, there's moreâ€¦
This formula is nice, neat and clean â€“ and when you're first learning how to flip a house, it will keep you out of harms way.
But as with any "rule", there are exceptionsâ€¦especially in those "more pricey" real estate markets.
What to Do When the 70% Rule Doesn't Apply
The 70% rule, however helpful it might not always work as we described above.
But the beauty is that it can always be adjusted upwards or downwards depending on your market.
So if your market is in the $400,000 range, the 70% rule can be raised to 80 or even 90%, depending on local circumstances.
The 70% rule could also be adjusted downward as well.
If in your market, the average sale price of a house is $120,000. In order to make that house worth your while, you may want to adjust the 70% rule down to 60% or even 55%, depending on your individual circumstance.
The bottom line is this: the 70% rule is flexible and keeps you of harmâ€™s way â€“ but, it depends on your market.
An experienced house flipping coach can certainly guide you through these sorts of calculations as well.
Exceptions to the 70% Rule Simplified
- Â The higher the price a property: the more flexibility you have on upside for the 70% rule. In these cases over $200,000 ARV, you may consider to be "higher-priced". In these cases, you may want to go to 80% or even 90%.
- Â The lower the price of a property: the more flexibility you have on the downside for the 70% rule. In these cases, any house flip under $200,000 ARV you may want to consider to be "lower-priced". In these cases, you may want to go to 55 or even 60%.
It's extremely important that when you're first learning how to flip houses, stick as close as you can to the 70% rule.
This one simple rule has kept me out of more bad deals that I can even care to remember!
My Experience Flipping Houses with the 70% Rule
At House Flipping School, we've been buying and selling house flips for quite some time.
Oftentimes, our buy and sell costs allow us for about a 30% margin on our flips. In some cases it's higher than that, check out our recent Onset house flip, where we netted over 30% after selling it in just two days!
So here are a few tips:
- If you aim for 30%, your take-home profit will be roughly 10 to 20% on average, once you figure in finance costs and other soft costs.
- If you feel the fees disrupt the 70% rule to the downside then just run a detailed cost analysis of all your expenses and see where you come out.
- After you do this, you may be perfectly happy with the projected profit. I mean, if you're gonna clear $10,000 to $15,000 first six months of work, wouldn't you do it?
- Keep in mind that you have to be competitive with the market and if you hold out for 60 or 65% could be 65% or 60% but keep in mind the lower you go depending on competition you may just be low & not get any deals.
Although the media and the house flipping reality TV shows make you believe that every flip you do is going to make you $70,000 in profit. And it's been widely reported in some major news publications that house flippers make a ton of money on each and every flip. This is just not the case.
These overinflated figures tend to give new real estate investors unrealistic expectations when they first start house flipping. To make profits like these you need to have been house flipping for a considerable period of time.
Sure, you may hit one on the park your first time around (and I really hope you do), but the odds are against it.
How to Flip Houses...70% or Bust?
As you may already know, every house flipping market is different, with different taxes, different lending environments and different price points. In some cases, we've gotten questions for markets as far away as Malaysia, New Zealand and Australia on this question.
As you can probably guess, the markets are slightly different than those our market house flipping in Massachusetts!
So stick to the 70% rule as much as you can and adjust it based upon your market conditions, but don't get too overly aggressive on the upside or the downside. Remember that the 70% rule is a guide that will keep you out of trouble if you stick to it.
Feel free to leave a comment below if you have any questions on the 70% rule and how it can be applied to your individual market, I'd be happy to help as much as I can.