The 70 Rule Explained: What House Flippers Need to Know

When it comes to rehabbing homes, there are plenty of gurus out there who will offer up magic formulas and “guaranteed” recipes for success. Most of that is worthless. However, there are a few simple principles and rules of thumb that can be incredibly helpful, especially when planning your first flip. These guidelines are far from the complete picture, and no flipper should rely entirely on these ideas, but they can be a useful starting point.

One of the more commonly used principles is the 70 Rule, also known as the 70 Percent Rule. The 70 Rule is a simple way to determine how much you should spend on a rehab property. The 70 Rule states that a flipper should not spend more than 70% of the expected After Repair Value (ARV) minus renovation costs.

So, for example, if the expected ARV of a rehab home is $200,000 and it would take $30,000 in renovations to get the home up to value, the maximum amount you should pay up front for that property is ($200,000 x 0.70) - $30,000, which works out to $110,000. According to the rule, paying $110,000 or less for this hypothetical property helps ensure that you’ll end up with a decent return on your investment. The 70 Rule is designed with other costs like insurance, points on any house flipping loans, property taxes, and unexpected expenses built in.

Of course, the big problem with the 70 Rule is that it assumes that the flipper who’s using it has a good sense of what the ARV of any given property will be. Therein lies the major flaw with the rule – it isn’t as novice friendly as it first appears.

So how do you determine the ARV of a property?

The simple way to calculate ARV is purchase price + value of renovations. The initial purchase price is more or less a given. What’s much harder to accurately estimate – especially if you don’t have a background in construction – is how much your intended renovations will cost you and how much value they will add to the property.

There are plenty of online resources that can help you come up with estimates, but perhaps the best way to come up with these estimates is to talk to a contractor who you trust and look at comparable homes in the neighborhood you’re eyeing for rehabbing houses.

A good contractor can give you solid estimates of how much specific repair jobs will cost, how long they take, and what sorts of discounts or shortcuts might be possible. If you don’t know any contractors, talk to at least three different ones before choosing the one you want to work with. A good, reliable contractor is an immensely valuable asset for any house flipper.

Alongside that research, you also need to study the local market and compare home prices with the amenities found within each house. Maybe a garage isn’t as important a selling point in your Southern California neighborhood as it is in Michigan. And maybe a stone façade is a lot more valuable in your community than you would have guessed.

Look at data from the last year in particular to make sure that your information is current, then use what you learn to come up with a conservative ARV estimate. It’s always tempting to be optimistic when planning a flip, but fight that urge. It’s much better to be pleasantly surprised with an exceptional ROI in the end than to merely scrape by.

Likewise, don’t let the 70 Rule box you in, but don’t completely disregard it either, especially if this is your first flip. Instincts and timing have their value, but numbers and good sense are always more useful.