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What is the 70% rule in real estate?
The 70% rule says that an investor should aim to pay no more than 70% of a property's after repair value, or ARV. This includes the price you pay for the property itself as well as any estimated repair costs.
Of course, this requires quite a bit of estimation. When applying the 70% rule, it's important to use a realistic estimate of the property's value after repairs are completed, as well as a conservative estimate of what the repairs will cost.
How do I use the 70% rule?
Applying the 70% rule is easy. Simply multiply the property's ARV by 0.7 to determine your maximum all-in cost.
For example, if you estimate that a property's ARV will be $200,000, this means that you should spend no more than $140,000. If you estimate that the property will need $40,000 in repairs, your purchase price should be no more than $100,000.
Does using the 70% rule guarantee a profit?
On the surface, the 70% rule may sound bulletproof. After all, if you pay $70,000 all-in for a property and sell it for $100,000, that's a pretty good profit margin.
However, the 70% rule is designed to ensure that you'll leave some wiggle room in your budget to account for unexpected costs, as well as expenses such as settlement charges, lender fees, and more. In a nutshell, the 70% rule is in no way a guarantee that you will make money house flipping, so it's still important to make sure you manage expenses and have a clear exit strategy.
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