Do You Need To Be Wicked Smart To Successfully Flip Houses?
Do you need to be wicked smart to successfully flip houses? This is a very common question and the answers real estate beginners get can be quite confusing.
Many real estate investment beginners get into this industry knowing that it’s important to “know your numbers”.
Yes, it is important that you know your numbers because if you don’t then your house flipping career will end as soon as it starts.
When I talk about “knowing your numbers”, I don’t mean trying to understand complex mathematical formulas.
As a matter of fact, you will do just fine if you know just a little 5th grade math.
Do You Need To Be Book Smart To Successfully Flip Houses?
The 70% Rule And 5th Grade Math
There are common rules and common formulas that you have to understand when it comes to the common math component of house flips. It’s something that a 5th grader can easily do. Take for example this math formula.
300 X 0.7 = X
X =?
If your answer is 210, then congratulations you are ready to become a house flipping mogul.
Believe it or not, the above formula is the most complicated math formula in house flipping. It’s a formula that’s guaranteed to save you thousands and even millions of dollars during your entire house flipping career.
It will also make you loads of money as well.
In math, we call this formula the 70% rule. I don’t know who invented it but all I can tell you is that it works.
When doing your house flipping math, you should ensure that you follow this rule even though it can’t be applied to every single market.
Before using the 70% rule, you have to determine the after repair value of the house. From there, you can apply the 70% rule to determine how much you should buy the house for in order to make a profit.
Is the 70% rule accurate? This depends on how well you can gauge the after repair value of the house. The more experience you have in flipping houses, the more accurately you will be able to apply the 70% rule.
Applying The 70% Rule
After determining the after repair value (ARV) of a really good house in a nice neighborhood, you figure that it would sell for $250, 000.
Take the $250, 000 and multiply it by 70% or by 0.7.
That would be $250, 000 X 0.7 = $175, 000.
Deduct your repair costs from $175, 000. Let’s say for instance your rehab costs $50, 000.
$175, 000- $50, 000 = $125, 000
Your maximum purchase price therefore should be $125, 000.
The math is pretty simple but the hard part is buying the house for $125, 000.
Why The 70% Rule Is Important
The 70% rule prevents you from making obvious mistakes that could cost you a lot of money. The 70% rule can either help you break even or turn a profit.
Are There Exceptions To The 70% Rule?
There are always exceptions to every rule so you can adjust the 70% rule to suit your own situation.
These are some of the exceptions to the rule:
1. Higher Priced Markets
A high priced property generally gives you more flexibility. A house priced at $250, 000 after ARV is considered to be higher priced. In this case, you should apply the 80% or 90% rule.
2. Lower Priced Markets
A low priced market also offers you more flexibility. If your property is less than $250, 000 then you may want to apply a 60% or 55% rule.
The most important thing to adhere to is a rule that will either help you make a profit or in the worst case scenario, break even. You may have to turn down some deals every so often and this is actually a good thing for you.
As you can see, you don’t have to be book smart to successfully flip houses; fifth grade math can help you avoid bad deals that could cost you a fortune.
What do you think about the 70% rule? I’d love to hear your comments on this.
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I always thought there was some kind of mathomatic formula to it from biding or buying houses.that does help and brings a big shot of confedence to keep learing more.thanks mike good stuff.
Mike,
Thanks for the info. What are the Usual thresholds for lower and higher markets?
Thanks,
Mark