House Flipping: How To Calculate the 70% Rule
House flipping is the act of purchasing a low-value home and completing repairs and renovations to turn it into a good home, essentially turning an ugly house into a pretty one.
Many people are turning to house flipping for side hustles or even full-time work. But what exactly goes into house flipping, and what makes it successful? Here’s where you can start! Learn how to calculate the 70% rule in the house flipping business.
What Is the 70% Rule?
The 70% rule is a method that house flippers use to determine the maximum price they should pay for a property to earn a profit. Additionally, real estate investors should pay 70% of a property’s after-repair value (ARV). However, keep in mind that the investor will not pay the cost of repairs and upgrades.
Here’s the calculation: ARV X 70% (.70) – estimated repair costs = maximum buying price
Why Is It Important?
The 70% rule can be critical when a house flipper is running low on time—and this often happens because, in the house flipping business, time is quite literally money. It’s essential to run your numbers and at least estimate where the buying and selling price should land.
It’s important to note that the 70% rule is not really a rule but simply a guideline, a strategy – it’s not an exact price, only an estimation of the maximum price you should pay for a low-value property. If you go over your max cost, you may end up losing money in the end, even after all that hard work!
How It Affects the Market
Using the 70% rule can be super helpful in your house flipping business, but that’s not to say that you shouldn’t do your due diligence and research the market. As we all know, the housing market can be unpredictable, so the rule may not always be accepted.
If you’re offering the property owner the numbers you calculated from the 70% rule, they may reject it if the market is hot. In that case, you’ll want to estimate a bit higher than 70%, which may be a bit riskier. Before calculating, do your homework and be smart about your calculations to make sure you turn the highest profit you can.
Great Locations To Start House Flipping
Though there is no such thing as a perfect town, some states and cities have gotten pretty close! Start in a thriving sought-after location like Arizona, specifically the Phoenix Metro area, to succeed in your house flipping business. Arizona is rapidly growing in its population because young couples have realized that it’s a great place to raise their family.
Another great location is Lansing, MI. With its booming job market and attractions, families are migrating here to live happily ever.
Start house flipping in locations where families are traveling to so you can help them find the perfect home!
However, keep in mind that it’s not just the 70% rule that will help you succeed; you must also avoid making common house flipping mistakes to build a solid and reliable reputation.
Now that you understand how to calculate the 70% rule in house flipping, you’re ready to get to work and start flipping a profit!