When you get started in your house flipping journey, there are a lot of aspects of this business you’ll learn along the way. The ins and outs of the trade, the benefits, the disadvantages, and more. One of the things you’ll hear about is the 70% rule to earn a profit — but what is the 70% rule in house flipping?
In this blog, we’ll explain all about the real estate 70% rule, from what it is to if it generates profits. Keep reading to learn!
The 70% Rule in House Flipping
The 70% rule comes in handy when determining if the property is worth the time and money it requires for flipping the house. In simple terms, you use this formula to see if the budget of the house exceeds 70 percent of its after-repair value, considering the renovation costs as well. By using the 70% percent formula, you can predict if the house flipping project is going to be a success or failure. This way, you will know if you should spend your money on a particular house or not.
Formula: After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price
Using the above-mentioned formula, you can estimate the potential profit on a flipped property.
Components of the 70% Rule in House Flipping
You need to be familiar with the key components of the formula to know if you’re getting a profitable price. These include:
After Repair Value (ARV)
First, you should calculate the selling price of the house once the renovations are complete. You can calculate the ARV by analyzing the latest costs of comparable properties in the area. Find properties with similar features, like the number of bedrooms, floors, square footage, etc. This will help you calculate what the house would be worth after the rehab.
Estimated Repair Costs
The next key component is the repair costs. By estimating the repair costs, you’ll know if the deal is profitable or not. Sometimes, investors overestimate the rehab costs. Therefore, always research the labor and repair costs before inserting in the 70% rule for house flipping.
Is the 70% Formula Accurate?
In the end, a 70% rule in house flipping is meant to prevent you from paying more than required on a fix-and-flip property. Hence, the formula can be helpful if you view it this way. Nevertheless, the 70% formula in real estate is just the starting point; the rest is up to you.
To answer, the 70% rule can help give you an estimate of the profit, but it’s possible that the results aren’t 100% accurate.
Interested in the Fix & Flip Trade?
There are many profits and benefits in flipping houses once you get the gist of the business. This is why we offer fix and flip loans to help you get started on your dreams. So what are you waiting for? Talk to the Red Door Funding team for more information about your real estate opportunities. You can visit us at 110 Avenue B #100, Stafford, TX 77477, United States. We are always eager to hear from you at (832) 539-1099.