If you are planning on getting into the business of fix and flip real estate investing, you may have heard of the 70% rule. This rule is considered by many experienced real estate investors to be a key factor in determining whether or not a fix and flip project is worth pursuing. Let’s take a closer look at what the 70% rule is, why it is important, and how it can help you make smart investment decisions.
What is the 70% rule?
The 70% rule is a guideline that real estate investors use to determine the maximum amount they should pay for a fix and flip property. The rule states that an investor should pay no more than 70% of the after-repair value (ARV) of a property, minus the cost of repairs. So, if a property’s ARV is $200,000 and it needs $30,000 worth of repairs, the most an investor should pay for the property is $110,000 ($200,000 x 0.7 – $30,000).
Why is the 70% rule important?
The 70% rule is important for several reasons. First and foremost, it helps investors avoid overpaying for a property. By using this guideline, investors can ensure that they are buying a property at a price that allows for a profit when the property is eventually sold. Additionally, the 70% rule takes into account the cost of repairs, which can be a significant expense in a fix and flip project. By factoring in these costs, investors can ensure that they are not underestimating the total cost of the project and can avoid running out of money before the project is complete.
Using the 70% rule can also help investors determine whether or not a property is a good investment. If the maximum price an investor can pay for a property using the 70% rule is still too high, it may be a sign that the property is not a good investment opportunity. On the other hand, if the maximum price is within an investor’s budget, it may be a good indication that the property is worth pursuing.
How can the 70% rule help you make smart investment decisions?
Here are a few tips to keep in mind when using the 70% rule:
- Be realistic about the ARV of the property. The after-repair value is a crucial factor in determining the maximum price you should pay for a property. Be sure to do your research and get a realistic estimate of the property’s value after it has been repaired.
- Don’t underestimate the cost of repairs. Repairs can be a significant expense in a fix and flip project, so be sure to get accurate estimates from contractors before making an offer on a property. Also be sure to account for things like insurance, and financial fees.
- Be conservative in your calculations. It’s always better to err on the side of caution when it comes to investing in real estate. By using the 70% rule and being conservative in your calculations, you can ensure that you are not taking on too much risk with your investment. This ultimately leads to ensuring you see a profit after putting in the work.
The 70% rule is a valuable guideline for real estate investors who are interested in fix and flip projects. By using this rule, investors can avoid overpaying for properties, factor in the cost of repairs, and make smart investment decisions. Whether you are a seasoned real estate investor or just getting started, the 70% rule is a tool that can help you succeed in the world of fix and flip real estate investing.