Understanding The 70% Rule

As fun fixing and flipping is, you are in this business to make money not just beautify the neighborhood.

Before deciding how much money you want to invest in your project, you need to have a realistic estimate of the after-repair-value (ARV) of the subject property.

The rule of 70% will allow you to make a clear and smart decisions on how much money you need to invest without unnecessarily jeopardizing your gain.

Specifically, the 70% rule states that you, the investor, should ultimately pay no more than 70% of the ARV minus the cost of repairs that need to be done. Remember the ARV is the value of the home after all the repairs have been completed.

**Sample Scenario**

There is a distressed house for sale in a good neighborhood in your city. The comp in the area show an average value of $150,000. You take your contractor to look at the prospective house and she/he determines that it will take approximately $15,000 to rehab the property for resale.

$150,000 x 0.7(70%)= $105,000

$105,000-$15,000(repairs)= $90,000

Using the “70% rule”- you should pay no more than $90,000 for the property, making your total investment on the structure including repairs= $105,000.

The 70% helps you to quickly identify if a property has potential for you or not and it is important because you need to purchase, rehab, and sell the property a little below market, all while protecting your profit margin.

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