The 70% Rule: Your Key to Profitable Real Estate Investing
What is the 70% Rule?
The 70% Rule is a fundamental principle in real estate investing that helps investors determine a property's purchase price. It's a simple yet powerful tool that can significantly impact your investment returns.
How Does it Work?
The 70% Rule states that you should aim to purchase a property for 70% or less of its After Repair Value (ARV) minus rehab. The ARV is the estimated market value of the property once all necessary repairs and renovations have been completed. This number can vary depending on what improvements have been done. There will be a difference in the ARV if you only do cosmetics versus changing the layout or adding an extra bedroom.
Here's a breakdown:
Determine the ARV: Estimate the property's value after repairs and renovations that you plan on doing to the home.
Calculate the Purchase Price: Multiply the ARV by 70%. This figure is the amount you should aim to pay for the property before subtracting repairs.
Factor in Repair Costs: Subtract the estimated repair costs from the maximum purchase price. This will give you the offer price that you should aim for.
Example:
$450,000 (ARV) * 0.70 (70%) - $40,000 (Repairs) = $275,000 (Offer Price)
Why Use the 70% Rule?
Maximizing Profit Potential: By following the 70% Rule, you can ensure that your investment has a significant profit margin.
Mitigating Risk: This rule helps to protect against unforeseen costs and market fluctuations.
Quick Turnaround: It allows you to purchase properties at a discount, renovate them efficiently, and sell them for a substantial profit.
A Note on Market Conditions
While the 70% Rule is a great starting point, it's important to be aware of current market conditions. In highly competitive markets, some investors may be willing to offer up to 80% of the ARV to secure deals. However, it's crucial to carefully assess the potential risks and rewards associated with such aggressive offers.
Conclusion
By understanding and applying the 70% Rule, you can increase your chances of successful real estate investments. Remember to conduct thorough due diligence, factor in all costs, and adapt your strategy to the specific market conditions.