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What is the 70 Percent Rule in Real Estate?

Real estate investors must move quickly to purchase houses to flip, especially in the current tight inventory market, where properties move quickly.  

But moving quickly to make an offer isn’t enough to ensure profitability on the flip. You also must buy at the right price so that you have enough margin between your costs and the after-repair value of the property to make the flip a good investment. 

That’s where the 70% rule comes in. It’s a calculation for house flippers to determine if a property has profit potential for them. Let’s break down what the 70% rule is, how to calculate it, why it’s important, and what else a flipper needs to do to buy a property at the right price. 

What is the 70% Rule in House Flipping

The 70% rule in real estate for house flippers states that investors should not pay more than 70% of a property's after-repair value (ARV) minus the costs of repairs when purchasing a property to flip. This rule states what an offer guideline should be and helps investors determine the maximum purchase price for a potential flip to ensure profitability. 

Calculating the 70% Rule

To calculate the 70% rule in real estate, use this 70% rule formula: Maximum Allowable Offer (MAO) = (ARV × 0.70) - Repair Costs 

For example: 

1. Estimate the ARV (what the property could sell for after renovations). 

2. Multiply the ARV by 0.70 (70%). 

3. Subtract the estimated repair costs and other costs, including closing costs, property taxes, and carrying costs. 

Let's say a property has an ARV of $300,000 and needs $45,000 in repairs:  

MAO = ($300,000 × 0.70) - $45,000 
MAO = $210,000 - $45,000 
MAO = $165,000 

This $165,000 represents the maximum an investor should offer for the property to maintain a potential profit margin. The remaining 30% accounts for expenses such as closing costs, holding costs, and profit.

Importance of 70% Rule for Investors

You can see here why the 70% rule is important. With one simple formula, an investor can pencil in the right offer for a property. This can help a flipper make offers faster while providing a guideline against overpaying for properties that do not have adequate profit potential. 

Applying the 70% Rule in Fix and Flip Investments 

It's important to note that while the 70% rule is a helpful guideline, it should be used in conjunction with thorough market research and accurate cost estimations. 

Analyzing Property Costs and ARV

The 70% rule won’t work well for a flipper until they become proficient at estimating two key elements of the formula—property rehab costs and after-repair value. If these numbers are off, the MAO for the property, as calculated by the 70% rule, will be inaccurate, and the flipper risks losing money. 

Calculating the after-repair value of a property requires both knowledge of the property and knowledge of the local market. A flipper must know what comparable properties in the area are sold for—based on square footage, number of bedrooms and bathrooms, and other desirable traits. The flipper must also know what kind of finishes (flooring, cabinets, fixtures, and more) a property needs to have to meet or exceed the price of local comparable properties. 

Once a flipper has an idea of how much a property could sell for after repair, then it’s time to estimate repairs and how much it will cost to upgrade the property to achieve that value. This includes the cost of the finishes discussed above but also any needed repairs for the property. Watch for big-ticket costs like foundation repair, HVAC and other mechanicals, and roofs. If you miss these costs in your estimation, your profit margins are in danger.

Potential Exceptions to the 70% Rule

Yes, there are exceptions to the 70% rule when flipping real estate. While the rule is a helpful guideline, it's not a strict mandate and can be adjusted based on various factors:

1. Property value:

For higher-priced properties, investors may have more flexibility. A $600,000 house purchased at 80% ARV might still provide a substantial $96,000 margin for unexpected costs and profits while providing a profit. Of course, bigger deals also lead to more risk, so take that into account when considering a purchase.

2. Market conditions:

Investors may adjust the percentage based on market dynamics: 

• Add 5-10% in sellers' markets 

• Subtract 5-10% in buyers' markets 

This accounts for how aggressive a flipper must be to purchase properties in a given market. Remember, though, that the goal is to profit from properties, not just purchase them. So increase your buy box with caution.  

3. Investor's real estate license:

If the flipper has a real estate license, they can save on fees for real estate agents, allowing for a higher purchase price of 3-6% while maintaining profitability.

4. Property uniqueness:

Properties with unique features or in high-demand areas may justify breaking the 70% rule for a specific flip.

5. Investment strategy:

The rule is less applicable for: 

• Long-term rental property investments (which should be based on potential rents and DSCR, more than rehab costs) 

• Micro-flipping or whole-tailing (flipping without renovations) 

6. Investor experience and risk tolerance:

More experienced investors might adjust the percentage based on their expertise and willingness to take on risk. 

It's important to note that while exceptions exist, increasing your MAO from the 70% rule increases risk. Investors should always perform thorough due diligence, accurately estimate costs, and consult with professionals before making investment decisions. 

Identifying Potential Fix and Flip Investments

As you begin looking for investment properties where you can apply the 70% rule, you can start in your local area by driving for dollars, where you physically find distressed property or other potential purchases and then research the owner to make an offer. You can visit local property auctions or go to online auction sites to find foreclosures or pre-foreclosed properties. Our guide to finding off-market properties offers more ways to find potential purchases.

70% Rule in Real Estate: Pros and Cons

Pros of the 70% Rule in Real Estate

Speed to offer:

This simple formula allows investors to make offers quickly.

Focus on profit:

The 70% rule house-flipping version takes the investor’s ego out of the purchase profit by maintaining a focus on a profitable project. 

Creating margin:

The 70% rule leaves room in case something goes wrong on a project, such as an unexpected major expense. By using the 70% rule, an investor leaves room to recover from a mistake in cost estimates or an unforeseen situation.

Cons of the 70% Rule in Real Estate

Experience required:

The 70% rule only works well when a flipper is good at estimating ARV and rehab costs. Flippers without experience will need to find tools to help them do this well. Real estate educators like Results Driven offer templates for estimating costs and 70% ARV calculators that can be helpful in estimating costs. 

Rule of thumb:

As mentioned, highly competitive sellers’ markets may not be able to use the real estate 70% rule. In other situations, flippers may be able to purchase properties below 70% of ARV. So, while the 70% rule is a good starting point, flippers need to make sure to use it as a starting point, not as an unchangeable rule.

Conclusion  

Lima One’s fix and flip loans work well with the 70% rule. We offer loans at up to 70% of value while financing up to 100% of rehab costs and up to 92.5% of purchase costs. This financing allows flippers to move quickly when they find the right property to buy. Get a quote today to see how you can get maximum leverage on your next flip with minimal money down.