Does the 70 percent rule apply to all real estate deals, or just fix-and-flip?
The 70 percent rule is a common term used by many real estate investors when flipping houses. The 70 percent rule is a way to determine what price to pay for a fix and flip to make money.
The 70 percent rule states that an investor should pay 70 percent of the ARV (After Repair Value) of a property minus the repairs needed. The ARV is the after repaired value and is what a home is worth after it is fully repaired.
If a home’s ARV is $150,000 and it needs $25,000 in repairs, then the 70 percent rule states an investor should pay $80,000 for the home. $150,000 x 70% = 105,000 – $25,000 = $80,000. Buying a house for $80,000 that will be worth $150,000 may seem like an awesome deal, but you have to remember all the costs involved in a fix and flip.
After Repair Value
Commission/Title Insurance/Other closing fees
Temporary Ownership Expenses
Financing terms and loan cost
The 70% rule is a great tool for investors, and it offers an adequately close estimate of how much money they should put into a property. But this rule is not followed with every flip, in fact, many professionals that flip ignore it altogether. The purpose of it is to help the buyer make sure they are not paying so much that they lose money in the end, so it is based on the idea that they will be selling it after repairs are made. If you are not buying a property with the intention of renovating it and selling it afterward, the 70% Rule need not be followed. If you are planning on buying to renovate and live in it, the 70% Rule would be a good way for you to save some money if the seller agrees to the price. But you would have a hard time successfully applying the 70% Rule to newer properties.