Does the 70 percent rule always apply to a good deal?

6 Replies

I recently purchased a home for 313k in a Minneapolis suburb. Great neighborhood and I wasn’t thinking of flipping it until I moved in and realized how nice the home could be.

I am thinking that with 60k (higher end of estimate) of work the home would be worth 480-500k in the Summer.

My question is, is the 70 percent rule outdated? At 313k + 60k I’m at roughly 385k which doesn’t quite make the 70 percent rule. But in my opinion I got extremely lucky with the purchase price and am trying to figure out how anybody could find a house that follows the 70 percent rule, at least in Minnesota.

I most likely won’t sell, but am curious. I will look into refinancing, or 1031 exchange if I do sell. Not sure how 1031 exchange works but will find out.

@Elliot Weldon

Who cares about rules...money is money, and if you're satisfied with the return, then do what makes sense.

I assume this is currently your primary home? If so, a 1031 won't work, but Consider staying for 2 years so your gain is tax free, up to 250k if you're single and 500k for a couple.

@Patrick Snyder

Thank you for the response. I am satisfied with the unrealized profit. And i do currently live in it. I just am thinking about how to pull out profit to purchase another one. I sold my last house in 2020 and had about an 80k profit minus expenses but the housing market obviously helped.

I am debating on going full investor mode and start BRRR method on properties or flipping them.

So many choices !

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70% rule can be a baseline but it's up to you on what you want to make per deal. Factor in time spent, taxes, etc. Not all deals will be amazing but if it's a stepping stone do it. Sounds like a nice home that'll be good to rehab and sell

The 70% rule is NOT a rule, but a guideline for a "back of the napkin" calculation. It is not something you base your investment decisions on solely. The price point plays a large role in how you may need to adjust this guideline. When you work in price points under $200k, you may need to be closer to 65% and deals over $300k can easily be profitable flips with 75% or even 80% depending on the details of that particular transaction. Light rehabs with lower holding periods can work at higher all-in %'s since your exposure to risk (via timeline) is reduced and your holding costs are reduced on quicker flips where conversely, you may need more room for a full gut to the studs rehab as your timeline of holding period will be much larger (as well as your risk factors).

 In today's seller's market, it is considered by many a home run to find a 70% flip deal in your price point. As your primary residence, so long as you live in it for 2 of the previous 5 years you own it, you get a $250k tax exclusion on any profits ($500k for married couples filing jointly) earned on the sale. As far as 1031 goes, you cannot qualify for a 1031 on flips unless your "intent" was to hold and you did so for at least 1 year, then you may qualify for a 1031 (but never on your primary residence).

The question to flip it or hold it can only be answered by you after doing a side by side comparison of the two transactions and the net result of each with your CPA. You could have tax exposure and what you do with the profits can determine your answer.

Your other option is to hold it and once you have the equity built up, you can cash out refi. The loan proceeds are tax free and you can use them to buy another. Rinse and repeat.