What’s the Most Overrated "Rule of Thumb" in House Flipping?

[Ellisa Riddick]

Everyone has a rule of thumb when flipping — 70% of ARV, $30/sqft rehab costs, comp within 0.5 miles, etc.

But in today’s market, a lot of those “rules” are starting to feel outdated or downright risky.

What’s one commonly repeated rule of thumb you think more investors need to rethink — and what do you use instead?

Would love to hear how others are adapting as the market shifts.

[Jeff S.]

Here’s a rule-of-thumb that never goes out of style, @Ellisa Riddick:

           Profit = Sales Price – All Expenses

This does not change as the market shifts. You should be able to estimate these and buy conservatively enough to accommodate reasonable variances. No one can predict the future, but real estate prices and construction costs don’t move so fast that you can’t make educated estimates.

We really do use the 70% rule-of-thumb, but for screening only -- and it works. In fact, for property prices over around $300k (which represents all of L.A.), we use 75% and can almost always show an associated 12% to 15% of ARV in profit using our detailed, expense-by-expense spreadsheet, when the rule-of-thumb is met. They really are related, but you must always estimate your expenses individually to know what you're getting into.

BTW, estimating the ARV using relevant comps within ½ mile is not a rule-of-thumb. Unless you are looking at rural properties, this is mandatory and a standard way to comp a property. We are just more conservative in our ARV estimates now that the market is turning.