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How to Flip Houses…As Simple As 5th Grade Math

How to Flip Houses With Fifth Grade MathWhen 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 certain…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%  = $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:

ARV=$200,000

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.

by Mike LaCava

I'm a full time house flipper who isn't afraid to share information and help upcoming investors. If you have a question just ask. I am happy to help!

  1. I have been reading and watching the videos on
    Your blog. I find them helpful, I am new to
    This and I am scare to lose but I am excited
    I am getting ready to start flipping,
    Do You think is a good idea to used only my
    Money on a flip? I just don’t want to have to pay interes
    To a lender.

    Reply
    1. Veronica, very interesting question and thank you for the compliment on our videos, it really does mean a lot!

      If you have the money and can do it all on your own, then I would suggest you do it that way. The downside is that it’s all your money, but the upside is that you will not have to pay any finance charges to a bank, a private lender or a hard money lender. As I tell many of my coaching students, if you have money to invest in real estate and want to get in this business, then use your own money as a Primary source of financing if at all possible. In most areas of the country, this is not possible because of the relative higher cost of real estate.

      Where are you investing? Do you have a flip already in mind? You could always shoot me a quick e-mail as well if you want to discuss it privately. Thanks, Mike

      Reply
  2. I’ve been interested in flipping houses for quite a while, but never really new how to get into it. I found your site this evening and am blown away. Some of the stuff I’ve read here and in your ebook are already sinking in and I can’t wait to get started.

    Reply
    1. Alex, great to hear! I am so happy that you’ve found our info helpful. When do you plan on getting started? Email me personally if you have any questions. Thanks! Mike

      Reply
  3. Hi Mike,
    Great site! Tons of information! Thank you for sharing! I have a question.
    About to partner up with someone who wants to flip homes. Going to form an LLC with him. We would both contribute 50% towards home and repairs. He will manage the flip with contractors and I would pay bills and handle necessary paperwork. Based on your experiences, what percentage of the revenues is fair for me to receive after the sale?
    Thanks,
    Rick

    Reply
    1. Hi Rick! My name is Ryan and I am currently handling blog comments on Mike’s behalf.

      Right now the best I can recommend would be to read Module 2 (http://houseflippingschool.com/tool-kit/#course) and to also go thru some of the house flips in progress videos.

      Or if you are in the New England area, attend one of Mike’s monthly meetups > http://houseflippingschool.com/house-flipping-school-meetups/

      We’ll soon be launching new services which can help get your questions answered personally by Mike.

      However at this time, Mike and his team are on break from coaching, in order to focus on taking their real estate business to the next level.

      Cheers,

      Ryan

      Reply
  4. I have a question Mike. I’m totally new and would like to flip a house for the first time, here is my question. When do I bring in the general contractor? Do I bring him to estimate repairs before I purchase a house while I’m viewing the property or after I’ve purchased. If it’s after, how would I know repair costs before I decide if the property would be profitable or not. Thanks.

    Reply
    1. If you don’t have the experience in estimating the repairs then it is important to bring a GC to help you price out the CORE. You should just explain to him that you want to invest in real estate and need an expert to assist in the costs of repairs. You may want to let him know if he helps you, you will in return like to do business with him if you end up buying the house. He needs to know he is not wasting his time. You may have to call a few to get some interest in this but you will. All the best!

      Reply

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