2 Rules Everyone Must Know When Flipping Houses
If you're first learning how to get into flipping houses, you'll need to know these 2 critical rules...
It seems like every week, I get a call from a former house flipping coaching student on deals they are looking to flip or buy, fix up and hold.
And on nearly every call, they are simply asking me if in just this one case, can they break the rules.
I end up giving them the same advice I gave them when I was coaching them on how to get into flipping houses.
The house flipping rules they always want to break are not complex. In fact, they’re just simple set of rules that if you stick to them, they will keep you out of trouble. And I’ve used them time and time again on all of my house flips.
So for anyone learning how to get into flipping houses, if you stick to these two rules, you’ll always be in the money on your house flips…guaranteed.
Is House Flipping Purely a Numbers Game?
The numbers do dictate a lot to you when you're flipping houses. Until you know how to use them can you even begin to change them for your purposes.
The raw numbers don’t lie. After you’ve flipped a few houses, you’ll start to get a sense when you can and cannot bend the rules to make a deal work.
But when you are first learning how to flip houses, the numbers should dictate your every move. When you flip houses and don't have the experience, the house flipping rules will always keep you out of trouble.
So in order to get into flipping houses successfully, there are two rules you should never stray from.
How to Get Into Flipping Houses: The 2 Rules You Must Know
Rule #1: Stick to your ARV
After Repair Value (or ARV) is the dollar amount that the house will sell for when its all fixed up and ready for sale. Having a good real estate broker who can determine ARV is essential to your success. Once you know the ARV, you can just work from that number to determine if the house is worth buying, fixing and flipping.
When getting your ARV, you should do your online and offline research on your won for sure. But nothing beats the expertise of a good real estate agent who can run comps and give you an accurate market analysis to work from. Go on Movoto, Zillow and some of the others, but at the end of the day, the real estate agent who really knows the area will give you your best information.
Six months: The shorter period of time the real estate agent goes back to determine the comps the better. This ideally should be no longer than 6 months. If you cannot find a comparable sale in the area, this may be a warning flag to be mindful of.
Although most markets don't shift dramatically in less than six months, longer they may. The shorter the time period between sales, usually the better.
No Eraser Math: We have all done this one, but learn from my mistakes...don't do it. "Eraser math" on your ARV is when you don't like the number, turn over your pencil and erase the right ARV and put in one you think you can get because of your real estate investing brilliance. Don't get cocky, you're not THAT good! Instead be conservative and stick to the number (or even lower) that they broker gives you and don’t deviate.
When you start “erasering” the ARV number, you are starting to "eraser" your profits. If the number given is too low, move on. There's always another flip.
Rule #2: Follow the 70% Rule Always
The 70% Rule is one of the most basic, but essential rules when getting into house flipping. Simply put, it keeps you out of trouble and in the money on every deal. If it doesn't work, then move on.
To use the 70% Rule effectively, you first need your ARV, so get that number first and foremost.
Depending on your market and the kind of house you're looking to flip, the 70% rule can fluctuate slightly, but not much. The general rule is: t
- The higher the ARV, the more the 70% Rule can increase
- The lower the ARV, the more the 70% Rule should decrease
The $200,000 - $300,000 ARV range should be your benchmark. If the ARV is $500,000, you may be able to go to 80%. If the ARV is $100,000, you may be forced to go with 60%.
So for the sake of argument, let's use the $200,000 - $300,000 ARV should be your benchmark.
So here's an example: In my market, the median selling price for single-family home in December 2012 was $303,500. Let's use an ARV of $300,000 for our example.
You would then use the 70% rule to determine:
1. How much you can spend on your renovations
2. The maximum allowable offer (MAO) to make on the property
Now do the 70% Rule math:
• Take the ARV ($300,000) and multiply it by 70%. This equals $210,000
• Minus your cost of renovation and repairs costs from the $210,000. In this case, the renovations were going to run you $60,000
• Now you have the maximum price that you can pay for the house, in this case it is $150,000
ARV = $300,000
Rehab = $60,000
70% Rule = $210,000
Maximum Purchase Price = $150,000
By using the 70% rule, you now have what's known as the MAO – or the Maximum Allowable Offer on the house. You don't offer this amount to buy it, you actually start probably at $140,000 and move up if need be. But you cannot go higher than $150,000.
Here's a video to explain it:[youtube]http://www.youtube.com/watch?v=ngvrh5yX7Q8[/youtube]
If you can't view it for some strange reason, click here.
The beauty of the 70% Rule is that it ensures you will come out in the black and in many cases with a very healthy profit of $30-50,000 if you do it right. The 30% left over from the 70% is 10% for soft costs and 20% for your profit.
Where it saves you is if your expense or your rehab costs are slightly higher, you're covered. Also if you cannot get your exact ARV when you sell, you're still covered and come out ahead. With that 70% Rule cushion, it’s like an insurance policy against any sort of serious loss, but it also assists in keeping you very profitable when you do everything else in the right way as well.
House Flipping Rules Conclusion
The buy, rehab and flip kind of real estate investing is a hugely profitable way to make money in real estate investing. We've all seen the house flipping shows which make it look easy. As I've said here many times before, it's not easy and never will be.
But it is far easier if you have the discipline to stick to the rules. And if you stick to these two rules above, rest assured, you will have a very long and very profitable house flipping career.
But only if you stick to the rules.
Like what you read? Get our free eBook "How to Flip Houses in 5 Simple Steps" to supercharge your house flipping career and get all kinds of cool insider strategies not discussed on the blog here.
Also...if you made it this far, please leave me a comment below! I’d love to hear about what you think about these two rules or any other rules you have that you stick to keep your real estate investing profitable!