What Is the 70 Percent Rule in Real Estate?

The 70 percent rule serves as a guiding principle for real estate investors, particularly those involved in property rehabilitation and resale. This guideline helps investors determine a maximum offer price for a distressed property, aiming to ensure profitability once renovated and sold. It provides a structured approach to evaluating potential investments, establishing a financial boundary for acquisitions.

Understanding the 70 Percent Rule’s Core Concept

The 70 percent rule is a fundamental principle in real estate investing, primarily utilized by individuals who purchase, renovate, and then quickly resell properties, often referred to as house flippers. Its core tenet dictates that an investor should not pay more than 70% of a property’s After-Repair Value (ARV) after accounting for the estimated costs of necessary renovations. This guideline is designed to establish a disciplined maximum purchase price, which helps manage the inherent risks associated with property rehabilitation projects.

The primary purpose of the 70 percent rule is to assist investors in quickly assessing the financial viability of a potential deal. By setting a clear limit on the acquisition price, it helps ensure that a sufficient profit margin remains after all expenses are covered. This rule acts as a preliminary screening tool, allowing investors to identify properties that align with their financial objectives and avoid overpaying for distressed assets. It implicitly accounts for not only the repair costs but also provides a buffer for holding costs, selling costs, and the desired profit.

Key Inputs for the 70 Percent Rule Calculation

Accurate application of the 70 percent rule hinges on precisely determining two main components: the After-Repair Value (ARV) and the Estimated Repair Costs. The After-Repair Value (ARV) represents the estimated market value of a property once all planned repairs, renovations, and improvements have been fully completed. To determine ARV, investors typically conduct a comparative market analysis (CMA), which involves examining recently sold properties in the same neighborhood that are similar in size, number of bedrooms and bathrooms, lot size, age, and condition after renovation. This analysis helps gauge what the property could realistically sell for in its improved state.

Estimated Repair Costs encompass all expenditures required to bring the property to its after-repair condition, including materials, labor, necessary permits, and professional fees. Estimating these costs accurately is crucial, as underestimating them can significantly erode potential profits. Practical methods for obtaining these estimates include securing multiple bids from qualified contractors, utilizing general cost estimation tools, or developing a detailed scope of work for all planned renovations.

Applying the 70 Percent Rule

Once the After-Repair Value (ARV) and Estimated Repair Costs have been determined, applying the 70 percent rule involves a straightforward calculation to arrive at the Maximum Allowable Offer (MAO). This formula is expressed as: Maximum Allowable Offer (MAO) = (After-Repair Value 0.70) – Estimated Repair Costs. The resulting MAO represents the highest price an investor should consider paying for the property to align with the rule’s profitability guidelines.

For example, consider a property with an estimated After-Repair Value (ARV) of $350,000. If the estimated repair costs for this property are $39,000, the calculation is: $350,000 0.70 = $245,000. Then, $245,000 – $39,000 = $206,000. Based on the 70 percent rule, the Maximum Allowable Offer for this property would be $206,000. This amount serves as the investor’s financial ceiling, ensuring a sufficient margin for profit upon resale.

Contextual Considerations for the 70 Percent Rule

While the 70 percent rule provides a valuable framework for real estate investors, it functions as a guideline rather than a rigid regulation. Its application often requires flexibility based on prevailing market conditions. In a highly competitive seller’s market, investors might find it necessary to adjust the percentage slightly higher, perhaps to 75%, to secure a desirable property, while still aiming for profitability. Conversely, in a slower buyer’s market, a lower percentage, such as 60%, might be more appropriate to account for potentially longer holding periods or reduced demand.

Various factors can influence an investor’s decision to adapt the rule. The specific property type, such as a high-end luxury home versus an entry-level residence, or its unique location, like an urban core versus a rural area, can necessitate adjustments to the target percentage. An investor’s experience level and individual strategy also play a role. While the rule directly incorporates repair costs, investors must also consider other expenses not explicitly in the formula, such as property taxes, insurance, utilities during renovation, and loan interest, collectively known as holding costs. These additional costs are implicitly covered by the profit buffer built into the 70% calculation.