70% Rule: Does it Apply in Costly Markets

[Dulce Beltran]

Hello BP community, I live and Sell Homes in San Diego CA. I stumbled upon this property, SOLD for $609,000 needed flooring, paint, kitchen and bathrooms (flipper refinished cabinets) then sold it for $709,000 two months later. Based on the 70% Rule, the investor should only have paid $496,300. After Selling expenses, estimated at 4.5% and Construction/Materials no more then $30K, for a rough estimate of $61,905 (doesn't include taxes). My question is, does that "70% rule" apply in High Acquisition markets? Is 85% ARV too much of a risk? Does that even leave enough spread to make a profit?

[J Scott]

It depends. If your fixed costs are 20% of ARV, then going to 85% means you're going to lose money. If your fixed costs are 5% of ARV, then going to 85% means you'll still make 10% of ARV in profit.

Instead of using the 70% rule, why not just calculate a purchase price based off actual numbers and desired profit?

https://www.biggerpockets.com/renewsblog/2010/03/1...