The 70 percent rule states that an investor should pay 70 percent of the after repair value (ARV) of a property minus the repairs needed. The ARV is what a home is worth after repairs.
Profit Margins and Requisites for House Flipping
- On average, experienced flippers target 10 to 20 percent profit of the ARV. A 10 percent profit is low and 20 percent is considered a "home run".
- In 2021, flipped homes sold for a median price of $267,000 with a gross profit of almost $67,000.
- Banks usually require a 620 credit score for loans. Credit score is less important for house flipping loans which are different than regular loans.
- While profits can vary, most flippers target $25,000 profit per flip or more.
- It’s recommended to have at least 20 percent cash on hand of the purchase price plus repairs before starting a flip. This helps cover unexpected repairs and ensures profit.
- Staying on budget helps reach anticipated ROI. Careful repair and flip planning can lead to a lucrative project.
Calculating the 70% Rule
The rule of 70 is a calculation to estimate the years to double an investment growing at a constant rate.
- By dividing 70 by the annual growth rate, investors determine the time for their money to double.
- In real estate, the 70% rule guides investors on purchase prices to profit from fix-and-flips. If a fixed property’s resale value is $100,000 and repairs cost $20,000, the rule states the maximum offer should be $50,000.
- Though an approximation for rates below 10%, the rule of 70 offers simple exponential growth management. It calculates debt pay-off schedules and projects savings growth over time.
- Also aids in retirement planning, as investors can determine if they are on target for their goals.
The rule of 70 encompasses more than just housing flipping; it is a versatile tool for various financial estimations and projections. However, the 30% rule is not explicitly detailed in the original text and therefore cannot be accurately addressed in this context.