Rules For House Flipping You Should Never Think Of Breaking
At one time or another, every real estate investor has broken at least one house flipping rule. Unfortunately, breaking any rules for house flipping has never made a deal go as smoothly as expected.
There are tons of rules that can real estate investors break including using eraser math, not adhering to the 70% rule or being dishonest.
We advise that you do not break any rules but the 70% rule can be broken under special circumstances.
Rules For House Flipping: When The 70% Rule Does Not Apply
The 70% rule may not apply exactly to your market but it still applies. The 70% rule is the basis that we use to determine house flipping math. There are many real estate markets and some may be more expensive than others. The 70% rule is there to keep you out of trouble and prevents you from doing eraser math.
Let’s say for instance you have determined that the ARV for a certain house is $200, 000, here’s how you should apply the 70% rule.
- Multiply the $200, 000 with 70%.
200, 000 X 0.7 = $140, 000
- Get the value of your rehab costs from your contractor and subtract them from $140, 000. Let’s say the rehab cost is $40, 000, you will subtract it from $140, 000 which equals to $100, 000
- $100, 000 will be your maximum purchase price for the house.
If you are a beginner in real estate investing, more so house flipping, it’s always advisable to start with less expensive sub-markets because they carry less risk. It’s far less risky to do a house flip on $400, 000 house than it is to do it on a $500, 000 one.
You may have to travel far but it is far much better to start in a less risky area but if you are not able to find a house in an affordable market, here is a way that you can slightly break the 70% rule.
When To Break The 70% Rule
Depending on the circumstances, you can raise the 70% rule to 80%. The more expensive a property is, the more flexibility you have on the upside for the 70% rule. If the property you are interested in is higher than $200, 000 then you can consider that property to be higher priced but this will depend on what your local market is.
As a rule of thumb, if you are sure you want to break the 70% rule, you have to also be sure that carrying costs, financing costs, rehab costs and other costs are spot on. You cannot use any type of eraser math in such a case. More importantly, you should be prepared to face certain risks. For instance, your ARV can fluctuate by $50, 000 meaning you just lost that much money in profits.
Some outside issues may change the amount you intended to spend on ARV such as issues with the foundation. If this happens, are you prepared to cushion and absorb the sudden drop in ARV or cost overrun?
If you use the 80% rule chances are very high that you won’t make a profit so you should be prepared for that. This is why if you are a beginner, you should try as much as possible to stick with the 70% rule.
Using this rule allows you a 30% margin on your flips and in some cases it is usually higher than that. Not every house flip will make you $100, 000 although you do have the potential of making a profit in almost every house flip. Of course if you flip higher priced property, you stand a chance of making more profits but there is also increased risk.
If you’ve made it this far, please leave a comment below. Have you broken the 70% rule and how did that go for you?