The 70 Percent Rule: Quick Reminder (2024)

The simple goal for house flipping is to maximize return on investment (ROI).

Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. An example of this would be a home’s ARV is $200,000 and it needs $40,000 in repairs. The 70% rule applied here means that the real estate investor should pay a maximum of $200,000 x 0.70= 140,000 – $40,000 = $100,000. This number does not include other fees associated with house flipping and does not mean that the remaining 30% is a locked in profit. That is often far from the reality as experienced investors know all too well.

Why Do house flippers use 70%?

In order to successfully flip houses you need to buy properties at a big enough discount to make a profit and cover all of the other 'Fixed Costs' (buying, holding, selling & financing costs).When you multiply the After Repair Value by 70% you are discounting the property by 30% to cover your Profit and Fixed Costs.

Many real estate investors opt to use private financing as a business strategy in order to grow their portfolios, flip more often, and to generate a greater return on equity for their investments. As a real estate investor, you will also want to consider interest and lender fees, factoring them into your profit margins. You want to make sure that you are working with a lender that is transparent and up-front about all costs, so you don’t have any surprises.

The 70% Rule is a good tool

Rule 70% is incredibly a good tool when analyzing a potential flip, but keep in mind it’s not the only tool you will need. It is merely a barometer to gauge the potential viability of an investment opportunity and help avoid over-paying for a property.

Choosing the Right Direct Private Money Lender is important as well and don’t forget to consider the 4cs of finding a lender—Cost, Capital, Credibility, Certainty. To learn more about the 4Cs of choosing a lender read more here.