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:
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.
Very informative. Thanks
Your welcome Amin. Very happy you found it helpful!
I do exactly this except I’m even stricter and use a 65% rule. I got use to calculating a higher margin due to hard money lenders higher interest rates and origination points. But it retrospect I know I’ve missed out on a few deals because I wouldn’t budge of my conservative numbers.
Nice idea Matt! Always best to be conservative with the #s.