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.
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
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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