Flipping Houses and the 70% Rule
Flipping homes has become so popular over the years because of the shows on TV. I am often asked how do you know which property is a good property to flip. The 70% rule is a very quick way to help determine this. You would take 70% of the after repair value (ARV) minus the repair costs. This tells you what the purchase price should be. For example...The house will sell for $200,000 after it is fixed up. $200,000 x 70% = $140,000. $140,000 - $30,000 (repair costs) = $110,000. The 70% rule tells you the purchase price should be near $110,000.
Happy Real Estate Investing!
-Jared
Most Popular Reply
@Jared Smith I'm interested to know your reasoning for this rule (really more of a heuristic, I think). 70% is an important number in a BRRRR (it's the number that allows you to get all your cash out), but why in a flip? I haven't done any flips yet, but it seems to me it depends on a lot of factors.
For example, if the rehab is pretty modest and won't take much time, I'd accept a smaller return than a major renovation that would take months. I'd spend $140k+25k rehab for $200k ARV (78%), but not $100k+65k rehab for the same ARV.
Also, the total value of the property matters. I'd do an easy flip with $140k+$25k for $200k ARV, but not $70k+$12.5K for $100k ARV -- same percentage, but the dollars aren't worth the effort -- $35k vs. $17.5k.
Does this make sense? It's different from a BRRRR, where 70% truly is a magic number.
@Nicholas Weckstein "tweak to your wants and needs" indeed!