Am I being to conservative? 70% rule

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Am I being to conservative? 70% rule

Matt C.
Wylie, TX · Member since 2018 · 23 posts · 9 votes

Hi Everyone!

Complete newbie here working on closing my first deal. I'm looking to fix and flip. As I've been evaluating deals I'm trying to follow the 70% rule. My question is how strictly I should be doing this in the DFW market. Specifically in the areas I am farming the average DOM is 10 days or less. As I'm analyzing deals from whole sellers even using their ARV which I do not really trust it's not possible using the 70% rule so my main question is should I be less conservative considering the market I'm in?

To use just one of the properties I’m looking at as an example it’s AVR is around $165k and $25k in repairs putting my max offer around $90,500. Now if I just work off my desired profit of $20k and factor all cost in I can go up to $95k which is what I’ve offered after my low ball initial offer was rejected. I’m finding out seller wants $110k which just doesn’t leave enough meat on it from my perspective as a newbie investor. That’s fine if the numbers don’t work they don’t work but I’m wondering if a more experienced investor would go for this and settle for a lower profit.

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8y

Instead of trying to force the numbers on a particular location....find the locations that fit the numbers. Find out where the majority of flips in your metro area are happening, see what the flippers are paying for them and selling them for...then copy them.

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  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    8y

    @Matt C. Your numbers seem fine. Just not finding deals, join the party!

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  • Tom Cyr
    Flipper/Rehabber · Grand Prairie, TX · Member since 2015 · 43 posts · 29 votes
    8y

    When I got into investing in the 90's, the rule was 65%. The market has gone through a couple of cycles since then and I've seen how newbies get killed not keeping their eye on the macro-economic environment. The thing about momentum markets is that they work great until they don't. It's a gambler's game around here in REI. The advice to buy and hold could be a decent proposal if you are married to REI and are happy with 8% total return.

    My approach is like Warren Buffet's - stay away from the crowds when it comes to investing.   This is a time when smart money is selling real estate, if they can find an attractive asset class to invest in with the cash.   It's a lot harder with big money than small money to make that adjustment.  

    Be patient.  A lot of "gurus" are peddling courses now that they can't buy at attractive prices.  It's a pattern that repeats itself every cycle.  Keep your eyes open, study the larger economy, and look at undervalued asset classes.  If you forget the primary rules of investing (buy low/sell high & don't lose money) you are doomed to soon be parted with your capital.

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  • Ryan Harris
    Cybersecurity Engineer · Dallas, TX · Member since 2015 · 11 posts · 9 votes
    8y

    Stu, yes, to make that strategy work, I think you would need to leave some cash tied up in the property, and hopefully buy it at 80-85% of current value, before repairs/fixup, not 80-85% of ARV. But I havent done it yet, so take that advice for what its worth ;) Also, I think Larry's answer was pretty good.

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  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    8y
    Originally posted by @Tanner Micheli:

    @Brent Coombs Thanks for the answer! Makes sense. I guess that's the benefit of the BRRRR strategy is that you can use other people's money to procure the distressed property, but have little exposure on the high interest rates because of your ability refi with more traditional financing in the short term.

    I don't think your exposure is that bad on interest rates, because you would likely be refinancing at the 6 month mark.

    Your biggest risk imo is did you get the rental income you expected, and did the property appraise for what you thought it would after you financed it.  Did the rehab cost what you expected?  If not the capital gets caught up in the process.

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