What Is The 70% Rule For Flipping Homes

Perhaps you've heard of the 80/20 rule that can help you when hunting for a house, but have you heard of the 70% rule for flipping homes? The 80/20 rule helps homeowners decide if a home is a good match based on the pros and cons. The 70% rule, on the other hand, helps flippers decide if a property is going to be worth the investment. It is essentially a formula to help you calculate the maximum safe budget.

The 70% rule is a real estate concept that calculates the profitability of a home flipping investment. By using this rule, the maximum buying price of a home should be equal to 70% of the after-repair value (ARV) minus the estimated repair costs. The formula to calculate the maximum buying price is ARV x 0.70 – estimated repair costs.

The after-repair value of a home is the estimated sale price once planned renovations are completed. The estimated repair cost is the highest budget needed to complete repairs and renovations on the home. So if your research reveals you can sell a home for $500,000 and you will spend $50,000 on repairs, the maximum you should spend on the home is $300,000 (500,000 x 0.70 – 50,000 = 300,000).

Ample research is required to find the actual ARV, which is essential for accurately calculating the 70% rule. Undercalculating may mean missed opportunities, whereas overcalculating could leave you in the hole. Ultimately, flipping homes is more than just a side hustle or a gamble; it's a business investment. As such, there is a path to success with a small margin for error that can help protect your investment and maximize your profits. When it comes to the ARV, that path starts with proper research.

The simplest way to calculate the ARV is to consider the expected market value after the renovations. The problem with only considering the cost of repairs as your repair value is that you don't account for the market value of those repairs in the location where you are selling. You can compare the project plan to local market prices. The neighborhood, renovation styles, property upgrades, square footage after the remodel, and more can factor into the market value of your repairs. Experts at Rocket Mortgage suggest using three to five comparable properties to get the most accurate ARV. Look at properties in the same area that meet at least three of your key criteria and use their market value to estimate an average for your property.

It's best to consider everything that you might want to renovate when creating your expense budget. While you certainly don't want to underdo it on the budget planning, you don't have to replace everything professionally. In fact, that was one of the mistakes Chip and Joanna Gaines learned while flipping their first house. Salvage whatever materials you can from the original house to save on material costs. You can also save on professional installation costs if you DIY anything you have the skills to do. It's always good to weigh the cost savings and your personal skills against the benefits of using professional installers for repairs that influence the home inspection, building regulations and safety, or insurance concerns.

To create an accurate estimate for your renovation costs, start by making a list of all the things that you want to renovate. Be sure to include all the things that may need to be replaced due to maintenance or based on the home inspection, such as the water softener or heater, gutters and roofing, piping, or electrical work. The home inspection is usually done after an offer has been made, but before closing. You can add a home inspection contingency clause in the offer to prevent any unexpected repairs from driving the cost of renovations beyond the 70% threshold.

Once you've considered all possible renovations, materials, labor, and DIY potential, don't forget to pad your budget. Not taking a flipping budget seriously and forgetting to pad it are among the biggest mistakes house flippers make, according to HGTV's Page Turner. She recommends adding 10% to the final budget for padding.