What is the breakdown of the 70% rule?

Question

I have been using the 70% rule, since learning about it on BP's free book. I've also heard of other percentages as well, but for now focus on only using 70%. My curiosity is on how this percentage came to be? is it comprised of agent fees, and other expenses? I'm just trying to get a deeper understanding of what this percentage means.

Scott E. · Answer

The rule says you are suppose to take 70% of ARV then subtract out your remodeling costs.

The 30% comprises of your profit, commissions, closing costs, inspections, appraisal, holding costs (taxes, insurance, utilities, landscaping), and staging costs.

I've found that in my market and price point, the properties I aquire meet closer to an "80% Rule"

Brent Coombs · Answer

@Scott S., I was just making the point that the higher the percentage of ARV minus repairs that you have to pay in the first instance, the lower your margin for error come flipping time.

However, if you have a great team co-ordinating your rehab projects, and your market is buoyant enough for you to have to pay close to 80% of ARV minus repairs, your turnover profits should still be worthwhile. All the best....

Scott E. · Answer

Haha, what??

Brent Coombs · Answer

Aha! Scott, it might be a case of "the early birds caught all the 70% worms", knowing that the late-risers such as yourself will pay them 80% to regurgitate those worms! (And it was the early-early birds who had caught those same worms at 65%)!...

http://www.biggerpockets.com/house-flip-estimation...

Orlando Paz · Answer

@Ryan Billingsley, @Richard Jeffries,  @Scott S. - Thanks guys!... I have been using it to determine maximum purchase price for rehabs. Seems like a great "rule of thumb", just wasn't clear on what it meant. I appreciate the informative input.

Richard Jeffries · Answer

Of course it has things to do with profit margins, resale, and contingencies as well

Richard Jeffries · Answer

It also is loosely derived from underwriting guidelines. 70% is the amount that a lot of lenders will lend against an investment property. So the if you spend less that 70% on the purchase, rehab, holding and closing costs you can get all of your cash out in a refinance.

Ryan Billingsley · Answer

The 70% rule starts with knowing the ARV of a property.  Then using 70% of the ARV as the starting point.  It does not include rehab, closing cost, or any other fees.  It is simply a general rule to figure out profit margin when analyzing a deal.

What is the breakdown of the 70% rule?

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