When you're first learning how to flip houses, any real estate investor will tell you how important it is to understand the numbers.
If you go into real estate deal without knowing your numbers cold, one thing is certainâ€¦you will have a very short house flipping career.
The good news is that in the house flipping business, you don't have to have a PhD in mathematics in order to understand the math behind house flipping. In fact, any 5th grader could do it.
For example, if you can understand numbers such as:
$200,000 / 70%Â = $140,000
Then congratulations, you have the requisite math skills to successfully flip houses.
By doing the basic math above, you just completed one of the most basic formulas when learning how to flip houses. This formula will save you thousands and dollars in mistakes in your house flipping career, but also make you a lot of money of the course of your career.
And all you needed to know was a little fifth grade math...
The Most Important Number When Learning How to Flip Houses
Once you have determined the ARV, or after repair value of a home, the next mathematical step in the house flipping process involves the vaunted 70% rule.
The effectiveness of the 70% rule all hinges upon your ARV and as with anything else, the more house flips you have under your belt the more accurate your ARV estimates will become.
The 70% rule can vary from house to house, it all depends on what your ARV is. The higher the ARV, the more the 70% rule can may be, up to 80% or even 90% in some cases.
However, the lower the ARV, and we usually use $200,000 is our benchmark the 70% rule may contract to 60% or even 50% in some cases. It really all depends on the kind of house that you're about to flip.
We mainly flip houses in the starter price range, which in the Massachusetts house flipping market is around $200,000. Your market might be slightly different so you may need to adjust the 70% rule based upon that.
We have used this example in some other posts explaining how to flip houses, but it's a good rule to review to make sure that you understand it fully.
Let's say you and your real estate agent have determined that the average selling price or ARV for houses that are similar to the one that you want to flip have been selling around $200,000 as an average.
You would then use the 70% rule to determine how much you should spend on your rehab, as well as how much you should offer for the property.
5th Grade House Flipping Math
Here is the fifth grade math:
70% rule: $200,000 x .70 = $140,000
The next step is to deduct your repair costs that you have gotten from your general contractor. If you general contractor says there's $40,000 in repairs needed then deduct $40,000 from the 70% rule.
Here's the fifth-grade math again:
Repair costs = $40,000
70% rule = $140,000
Maximum buy price = $100,000
I explain it in this video here:
You Don't Need to Be Smarter Than a 5th Grader to Learn How to Flip Houses
I am simplifying the house flipping formula just a bit as there are many other mathematical calculations that any successful real estate investor must do in order to be successful flipping houses, but the bottom line is that most important math in house flipping is very simple math.
The 70% rule really ensures you against downside risk and gives you a cushion to help you turn a profit. when students are first learning how to flip houses, this is a rule, we make sure they understand inside and out and that anyone new to flipping houses does not vary from it by fudging their numbers in order to get the deal done.
So stick to the rules when you're first learning how to flip houses because the 70% rule will save you over and over again. But only if you adhere to it on each and every deal.