Mastering Real Estate Investment

What is the 70% Rule?

The 70% rule is a guideline commonly used by real estate investors, particularly house flippers. It advises that an investor should not pay more than 70% of the After-Repair Value (ARV) of a property when purchasing it.

How Does the 70% Rule Work?

Calculate the ARV. Determine the estimated value of the property after it has been renovated or repaired. This value is based on comparable sales in the area.

Apply the 70% Rule. Multiply the ARV by 0.7 (or 70%) to find the maximum amount an investor should pay for the property.

Account for Renovation Costs. Subtract the estimated cost of repairs and renovations from the result obtained in Step 2 to determine the maximum purchase price.

Why Use the 70% Rule?

Risk Mitigation. By complying with the 70% rule, investors aim to ensure they have a sufficient margin of safety to cover unexpected expenses and market fluctuations.

Profitability. Following this rule helps investors maintain healthy profit margins on their real estate investments.

Quick Evaluation. The 70% rule provides a simple and efficient way to assess potential deals and make informed buying decisions.

Examples

Suppose the ARV of a property is estimated to be $200,000, and the estimated cost of repairs is $30,000.

$200,000 x 0.7 = $140,000 (Maximum purchase price according to the 70% rule)

$140,000 - $30,000 = $110,000 (Maximum offer price accounting for renovation costs)

In this example, an investor should not pay more than $110,000 for the property to adhere to the 70% rule and maintain a profitable investment.

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How Comparable Drive Success in House Flipping with the 70% Rule

What Are Comparables?

Comparables, often referred to as "comps," are used to determine the fair value of a property based on the prices of similar properties that have been recently sold in the same area.

How Do They Work?

When assessing comparables, it's crucial to look at properties with similar characteristics such as size, location, age, condition, and amenities. By comparing these similar properties, investors can estimate the potential value of the property they are interested in.

Examples of Comparables

For instance, if you're considering selling a house, you might look at recent sales of similar houses in your neighborhood to determine a competitive listing price. Real estate agents often provide comparables to help sellers and buyers make informed decisions.

Let's consider an example

Imagine you're planning to sell your three-bedroom, two-bathroom house located in a suburban neighborhood. To determine a competitive listing price, you decide to look at recent sales of similar houses in your area, which are known as comparables or comps.

You discover that two similar houses in your neighborhood were recently sold:

House A

Sold for $250,000. It has three bedrooms, two bathrooms, a two-car garage, and a backyard. It's in good condition and was built around the same time as your house.

House B

Sold for $265,000. It also has three bedrooms, two bathrooms, a two-car garage, and a backyard. However, it features some upgrades like a renovated kitchen and updated appliances.

Based on these comparables, you can estimate the competitive listing price for your house. Since your house is similar in size, condition, and amenities to both House A and House B, you might consider pricing it somewhere between $250,000 and $265,000.

Applying Comparables in Real Estate Investment

In House Flipping

In the context of the 70% rule and house flipping, comparables play a vital role. House flippers use comparables to assess the after-repair value (ARV) of a property, which is essential for determining the maximum purchase price they should pay to ensure a profitable flip.

Let's walk through an example of how comparables are applied in real estate investment, specifically in house flipping:

Imagine you're a house flipper looking to purchase a property in a suburban neighborhood to renovate and sell for a profit. You come across a distressed property that you're interested in flipping.

Here are the details:

The property is a three-bedroom, two-bathroom house in need of significant repairs and updates.

You estimate that once renovated, similar houses in the neighborhood sell for around $300,000.

To determine whether this property is a good investment according to the 70% rule, you need to calculate the maximum purchase price you should pay.

Using comparables, you find recent sales of similar houses in the area:

House A sold for $280,000 after being renovated.

House B sold for $290,000 after being renovated.

House C sold for $295,000 after being renovated.

Based on these comparables, you estimate the ARV of the property you're interested in flipping to be approximately $300,000.

Now, applying the 70% rule:

ARV = $300,000

70% of ARV = $300,000 x 0.7 = $210,000

You subtract the estimated renovation costs from this amount to determine the maximum purchase price. Let's say you estimate the renovation costs to be $40,000.

Maximum Purchase Price = $210,000 - $40,000 = $170,000

According to the 70% rule, you should not pay more than $170,000 for the distressed property to ensure a profitable flip.

This example demonstrates how comparables are used by house flippers to assess the ARV of a property and determine the maximum purchase price they should pay, ultimately guiding their investment decisions and ensuring profitability in the flipping process.

How Do Comps Apply in the 70% Rule and House Flipping?

Determining ARV. House flippers use comparables to estimate the ARV of property by analyzing recent sales of similar properties in the area. This ARV serves as a benchmark for calculating the maximum purchase price according to the 70% rule.

Setting Maximum Purchase Price. According to the 70% rule, investors should not pay more than 70% of the ARV minus repair costs for a property. Comparables help investors determine a realistic ARV, allowing them to calculate the maximum purchase price they can offer to ensure a profitable flip.

Minimizing Risk. By using comparables to estimate the ARV and adhering to the 70% rule, house flippers can mitigate risks and ensure profitability in their investment. Comparables provide valuable market insights that guide investment decisions and help investors avoid overpaying for properties.

Understanding When to Use the 70% Rule in House Flipping

The 70% rule is a guideline used by real estate investors, especially those flipping houses, to determine if a property is a good investment. Here's a simple breakdown:

When does it apply?

The 70% rule is commonly used by investors who plan to buy distressed properties, renovate them, and sell them for a profit (a strategy known as flipping). It helps ensure that they purchase properties at a low enough price to make a profit after renovations and selling costs.

Is it always accurate?

While the 70% rule is a helpful guideline, it's not foolproof. Market conditions, repair estimates, and other factors can affect its accuracy. It's essential to conduct thorough research, work with real estate professionals, and use conservative estimates when applying this rule.

Assessing Untapped Property Potential: A Step-by-Step Guide

Checking the untapped development opportunity of a property involves assessing its potential for further enhancement or improvement beyond its current state. This assessment aims to identify areas where additional investment or renovation could significantly increase the property's value. Here are some steps to check the untapped development opportunity of a property:

Evaluate Current Condition

Start by thoroughly inspecting the property to understand its current condition, including any strengths, weaknesses, or areas for improvement. Take note of features that may appeal to buyers as well as aspects that need updating or renovation.

Research Comparable Properties

Analyze recent sales data and market trends for similar properties in the area. Look for examples of properties that have undergone successful development projects and achieved increased value. This research helps identify potential improvements that could be made to the property being evaluated.

Identify Value-Add Opportunities

Determine specific areas where improvements or additions could enhance the property's appeal and value. This may include renovating outdated features, expanding living space, improving energy efficiency, or enhancing curb appeal through landscaping.

Estimate Costs and ROI

Once value-added opportunities are identified, estimate the costs involved in implementing these improvements. Consider factors such as materials, labor, permits, and potential timeframes for completion. Calculate the potential return on investment (ROI) by comparing the projected increase in property value to the total cost of improvements.

Consider Zoning and Regulations

Check local zoning regulations and building codes to ensure proposed improvements comply with legal requirements. This includes verifying restrictions on property use, setback requirements, height limitations, and any other relevant regulations that may impact development plans.

Consult Professionals

Seek advice from real estate agents, contractors, architects, or other professionals with expertise in property development. They can provide valuable insights and recommendations for maximizing the property's potential while navigating regulatory requirements and budget constraints.

Create a Development Plan

Based on your findings and consultations, develop a comprehensive plan outlining the proposed improvements and their implementation timeline. Include detailed cost estimates, financing options, and projected returns to guide decision-making and secure necessary approvals.

FAQ’s

How do I calculate the after-repair value (ARV) of a property?

The ARV is estimated by comparing similar renovated properties (comps) in the area. By analyzing these comps, investors can predict what the property could sell for after repairs.

Why is the 70% rule used in real estate investing?

The 70% rule helps minimize risks and ensure profitability by limiting the purchase price to 70% of the ARV. This buffer covers renovation costs and unexpected expenses.

Can the 70% rule be applied to all types of properties?

While commonly used in house flipping, the 70% rule can apply to any property requiring renovations. However, adjustments may be needed based on property type and market conditions.

What costs should be included in total repair cost calculations?

Total repair costs should cover materials, labor, permits, inspections, and any other expenses related to renovating the property.

Is the 70% rule a guarantee of profitability?

No, it's not a guarantee. While it helps minimize risks, profitability depends on various factors like renovation costs and market fluctuations.

How accurate is ARV estimation in the 70% rule?

ARV accuracy depends on factors like comp quality and market conditions. Investors should conduct thorough research to ensure accuracy.

What happens if I pay more than 70% of the ARV for a property?

Paying more reduces profit margins and increases the risk of financial loss, especially if renovation costs are high or the property doesn't sell as expected.

Are there exceptions to the 70% rule?

Yes, depending on unique circumstances like market conditions or investment strategies. Experienced investors may deviate cautiously.

Should I always follow the 70% rule?

While useful, it's not a one-size-fits-all approach. Investors should consider each deal's specifics, conduct due diligence, and consult professionals for informed decisions.

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