📋 Table of Contents
What is the 70% Rule?
The 70% rule is a quick evaluation method used by real estate investors to determine the maximum amount they should pay for a fix-and-flip property.
This rule states that an investor should pay no more than 70% of a property's after-repair value (ARV) minus the estimated repair costs. It's designed to ensure adequate profit margins while accounting for holding costs, selling expenses, and unforeseen issues.
Key Takeaway
The 70% rule provides a quick screening tool for investment properties, but should be combined with detailed financial analysis for final decisions.
Formula and Calculation
70% Rule Formula
Maximum Purchase Price = (ARV × 70%) - Estimated Repair Costs
Step-by-Step Calculation
- Determine ARV: Research comparable sales to estimate the property's value after repairs
- Estimate Repair Costs: Get contractor bids or use per-square-foot estimates
- Apply the Formula: Multiply ARV by 70% and subtract repair costs
- Compare to Asking Price: Only proceed if the asking price is below your calculated maximum
Practical Example
Example Property Analysis
- Property: 3-bedroom, 2-bathroom house
- Estimated ARV: $300,000 (based on recent comps)
- Estimated Repair Costs: $40,000
- Asking Price: $180,000
Calculation:
Maximum Purchase Price = ($300,000 × 70%) - $40,000
Maximum Purchase Price = $210,000 - $40,000 = $170,000
Decision: Pass on this deal. The asking price of $180,000 exceeds our maximum of $170,000.
When to Use the 70% Rule
Best Scenarios for the 70% Rule:
- Initial Property Screening: Quickly evaluate multiple properties
- Competitive Markets: Make fast decisions in hot markets
- Experienced Investors: Those with reliable repair cost estimates
- Traditional Fix-and-Flip: Properties requiring moderate rehabilitation
Market Considerations:
The 70% rule works best in markets with:
- Stable property values
- Predictable repair costs
- Average days on market under 90 days
- Strong buyer demand
Limitations and Considerations
Important Limitations
- Market Variations: High-cost markets may require adjusting the percentage
- Property Type: Luxury properties may have different profit margins
- Hidden Costs: Doesn't account for all holding and transaction costs
- Market Timing: Assumes stable market conditions
Additional Costs to Consider:
- Holding costs (utilities, insurance, taxes)
- Financing costs (interest, loan fees)
- Selling costs (agent commissions, closing costs)
- Unexpected repairs and overruns
Market Variations
Different markets may require adjusting the traditional 70% rule:
Adjusted Rules by Market Type
- High-Cost Markets: Consider 65-75% rule
- Emerging Markets: May use 75-80% rule
- Declining Markets: Stick to 65-70% rule for safety
- Rural Markets: Factor in longer holding periods
Conclusion
The 70% rule serves as an excellent starting point for evaluating fix-and-flip investments, but it should be part of a comprehensive analysis strategy. Successful investors combine this rule with detailed market research, accurate repair estimates, and thorough financial projections.
Success Tips
- Always verify ARV with recent comparable sales
- Get multiple contractor bids for repair estimates
- Factor in your market's specific conditions
- Maintain conservative estimates to protect profit margins
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