What You Need To Know About The 70% Rule In House Flipping
If you are new to house flipping, it’s crucial for you to know about the 70% rule. Many real estate investors utilize this to estimate if the house is worth the flip. But what’s 70% rule in house flipping? In simple terms, it’s a guideline that states are not supposed to pay more than 70% of the property’s estimated value after repairs and renovations, subtracting the cost of those repairs, in order to make a profit. It allows investors to determine which investment properties are profitable by ensuring that the purchase price, including the cost of repairs, will not exceed the property’s estimated value improvements. Curious to know more? Continue reading and find out.
It’s a Rough Estimate
The 70% rule in house flipping is only a rough estimate and you should keep this in mind when flipping a house. It does not take into account all the factors that can affect the actual value of a property. For instance, the location can heavily influence the value but the 70% rule does not cover it. Thus, it’s important that you also consider factors such as the cost of repairs, the local economy’s state, and the availability of similar properties in the area.
The 70% Rule Assumes
As mentioned above, it’s only a rough estimate hence why the 70% rule only assumes. It assumes that the local real estate market is favorable and the property will sell swiftly at a good price. However, it may be difficult to sell the property or to sell it at a price that results to profit. Furthermore, by using the 70% rule, it assumes that the property is in adequate condition and that the repair’s cost will be average. But if the property is in bad condition or the cost of repairs is higher than the average, the investment will not be profitable.
Competition is not a Direct Factor
Of course, when you’re flipping a house, you will need to take into consideration your competition. However, it is a separate factor because the 70% rule does not cover it. Investors need to know their competition taking into account the real estate market, properties’ availability for sale, and the number of potential buyers.
Some Costs are Excluded
Because the 70% rule in house flipping revolves around the After Repair Value (ARV), there are other costs that are excluded from the estimation. Here are the excluded costs:
- Financing Costs: Costs such as mortgage interest, points and fees are not calculated by the 70% rule. These costs can pile up and will heavily affect the overall profit from a house flip.
- Closing Costs: Title insurance, legal fees, and transfer taxes are excluded.
- Marketing costs: Advertising, staging, and photography are also not included.
- Realtor costs: Fees charged by the real estate agents are excluded and they usually charge a commission which affects the value of the property.
To Summarize
The 70% is still very useful for investors. It’s helpful as a starting point to roughly estimate the After Repair Value (ARV) of a property. However, you should still do your own research and evaluate the property based on other factors that are not covered by the 70% rule. Interested to know more? Contact us at Real Equity Acquisitions now!