Any house flipper worth his or her salt has probably heard of the 70% rule. But few fully understand exactly what it means or why it is so important.
So let’s break it down.
How Is It Calculated?
Essentially, the 70% rule means that the purchase price of the property plus the estimated repair costs should not exceed 70% of the after repair value or ARV. So if you expect the renovated property to sell for, say, $200K, you would not want to spend more than $140K on the purchase and repairs (including a 15% contingency repair reserve). So your maximum offer price would be $100K. The math is simple but understanding the logic behind the calculations is critical.
Why Does It Matter?
In a nutshell, the 70% rule is designed to ensure that your project is profitable. Because,when all is said and done, if you’re not making money, what is the point? There is little sense in pouring your blood, sweat and tears into a reno unless there is sufficient payback at the end. In most cases, the rule allows for a decent profit after all the carrying costs—loan interest, insurance payments, etc.—are covered.
Good Rule of Thumb
The 70% rule is a good place to start but it isn’t set in stone. There may very well be extenuating circumstances that affect your project. Are you planning to buy and hold the property rather than fix and flip it? Then the level of repair work you put in may be lower than if you were planning to sell it. Perhaps you plan to self-finance part of the project? That may lead to lower financing costs in the end, allowing you to boost your purchase price. Or maybe your ARV is in the stratosphere with home prices rising—that may merit a higher outlay than 70%.
Financing Matters
In the end, no matter what your exit strategy or particular circumstances, you want to find a funding partner who has your back. Here at NavCap, we know what it takes to make your next deal profitable. Put our experience to work for you and reach out to us today at info@gonavcap.com or 443.603.0193. We look forward to working with you!