What Is the 70 Percent Rule for House Flipping?

Property flipping involves purchasing real estate, renovating it, and then selling it for a profit. Many investors rely on a guideline known as the 70 percent rule. This rule helps in determining a maximum offer price for a property to ensure there is sufficient room for renovation costs and a desired profit margin.

Understanding the 70 Percent Rule

The 70 percent rule dictates that an investor should pay no more than 70% of a property’s After Repair Value (ARV), subtracting the estimated repair costs. This framework aims to provide a sufficient profit margin, accounting for potential unforeseen expenses, holding costs, and selling expenses that arise during the flipping process. The rationale behind the 70% figure is to build in a buffer for profitability and risk mitigation. It acknowledges that renovation projects often encounter unexpected issues and that holding and selling a property incurs significant costs. This rule serves as a practical initial screening mechanism for investors to quickly identify potentially profitable deals.

Calculating the Maximum Offer Price

Applying the 70 percent rule involves a straightforward calculation to determine the maximum offer an investor should make on a property. The formula is: Maximum Offer Price = (After Repair Value 0.70) – Estimated Repair Costs. For example, consider a property with an estimated After Repair Value (ARV) of $300,000, and the projected repair costs are $50,000. Using the 70 percent rule, the calculation would be ($300,000 0.70) – $50,000. This results in $210,000 – $50,000, indicating a maximum offer price of $160,000. Another illustration involves a property with an ARV of $400,000 and estimated repairs of $70,000. The maximum offer price would be calculated as ($400,000 0.70) – $70,000, which equals $280,000 – $70,000. Therefore, the investor should aim to pay no more than $210,000 for this property.

Estimating After Repair Value and Repair Costs

Estimating After Repair Value

Accurately determining the After Repair Value (ARV) is a foundational step for applying the 70 percent rule. ARV represents the estimated market value of a property after all planned renovations and improvements have been completed. To estimate ARV, investors typically analyze comparable recently sold properties, known as “comps,” in the same area that are similar in size, features, and condition to the prospective property post-renovation. Market trends also play a role in this valuation, as they can influence the future sale price.

Estimating Repair Costs

Estimating repair costs involves a detailed assessment of all expenses required to bring the property to its After Repair Value standard. This includes costs for materials, labor, and necessary permits. Investors can gather quotes from general contractors for a comprehensive estimate or use methods like estimating costs per square foot based on the scope of work. It is also advisable to include a contingency fund, typically 10% to 20% of the estimated repair costs, to cover unforeseen issues that often arise during renovations.

Additional Financial Considerations for Property Investing

While the 70 percent rule provides a framework for the initial purchase, successful property flipping requires accounting for other significant financial considerations not directly embedded in its core calculation. These additional costs can substantially impact overall profitability. A comprehensive financial analysis must incorporate these elements to provide a realistic picture of the investment.

Holding Costs

Holding costs are ongoing expenses incurred while the property is owned and undergoing renovation, prior to its sale. These can include monthly mortgage payments if the property is financed, property taxes which might range from $150 to $300 per month, and property insurance typically between $100 and $200 monthly. Utility expenses, such as electricity, water, and gas, are also part of holding costs, often ranging from $100 to $350 per month, along with any homeowners association (HOA) dues which can average around $300 per month, though they vary widely.

Selling Costs

Selling costs are incurred when the renovated property is listed and sold. Real estate agent commissions are a significant portion, with the national average typically around 5.44% of the sale price, often split between the listing and buyer’s agents. Other seller closing costs, which can range from 1.81% to 10% of the sale price (including commissions), include transfer taxes, title insurance, escrow fees, and attorney fees.

Financing Costs

Financing costs, beyond just interest, encompass fees charged by lenders, such as loan origination fees, which are typically 0.5% to 1% of the loan amount, covering the processing and underwriting of the loan.