Flipping real estate is a great way to make an investment pay off in relatively short order. Whether the property is currently in distress, or simply needs a little spit and polish to make it fly off the market, real estate flippers have been buying, upgrading, and selling homes at a profit for as long as the market has existed. However, it hasn't been until fairly recently (in terms of how long the market has existed) that real estate flippers have begun to use what's called the 70% rule.
What is The 70% Rule?
According to Bigger Pockets, the 70% rule is a simple investment tool that lets you calculate your bid based on the after repair value (ARV) and estimated repair costs (ERC) of a given property. This ensures that you have some wiggle room when it comes to the price a home has to go for in order for you to make a profit, and it gives you some idea of the risk you're taking before you make a bid.
For example, say there is a property going for $50,000. It looks fine, and it may be a little isolated, but the plumbing and wiring needs to be re-done, and the kitchen could use an upgrade. You estimate the repair costs at $15,000. So, you simply apply the formula:
[50,000 * .7] - 15,000 = 20,000
That gives you an estimate of what you're looking at when it comes to bidding. However, the 70% rule is far from perfect. Especially since it may lead you to low-balling your bidding, and missing out on some investment opportunities. Even worse, though, the rule is far from useful for those who are playing a long game when it comes to real estate.
It's Really More Like a Guideline
While there are some people who swear by the 70% rule, it's important to remember that it is really more of a guideline. Under ideal circumstances, if everything works out the way you have it down on paper, this rule would give you the exact number you need. Of course, the finest battle plan in the world goes up in smoke as soon as someone steps on the battlefield, and the same is often true for real estate rules.
They're good to know, but sometimes the "rules" don't work in the situation you find yourself in. That's why, if you're going to get involved in flipping real estate, it pays to know when to stick to the rules, and when to break them.
For example, look at your investment, and at the costs. Ask yourself what the return is likely to be, and then take a step back to examine the deal from a different angle. Once you've gotten as complete a picture as you can, that's when you need to know what sort of bids the property is likely to get. Are you in a competitive area, or one where property owners will take what they can get? Is your initial bid close to the asking price, or will you have to talk the owners down? What do you stand to lose, and what do you stand to gain?
The 70% rule has its uses, but it's a lot like the rules of grammar. The more time you spend in the field, the more you realize that the rules you learned early on have more exceptions than not. So you need to learn to use your own judgment, and to trust your experience and skill, rather than a reasonable-sounding number. For more information on the 70% rule, as well as on other rules of real estate that might trip you up when you get involved in flipping properties, simply contact us today!
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