The essential part of flipping a house is buying the property at a low enough price that you can receive a large profit when you sell. Overspending on an investment may make it nearly impossible to make back what you paid, let alone any kind of real profit.
To help determine if a home’s price is right for investing, you can use the 70% rule. While this rule is just a guideline, and you should still research market trends, it can be a great resource to ensure you’re not overpaying for your investment property.
Learn more about the 70% rule, its implications, and how it works if you fix and flip properties.
The 70% Rule in Real Estate Investing
The 70% rule is a fundamental principle in real estate investing, which suggests that a property should be purchased for no more than 70% of its after-repair value. The purpose of the rule is to protect investors from losing money on a property.
If a property is projected to be worth $100,000 after it has been repaired, an investor should only pay $70,000 for it. By adhering to the 70% rule, investors can help ensure that they will have enough money to cover the repairs and renovation costs.
The 70% rule can also help investors estimate their potential profit on a property. If an investor purchases a property for $70,000 and sells it for $100,000, they would make a profit of $30,000, depending on the extent and cost of the repairs.
The 70% rule is a good starting point for your investment decision-making process, but there are other things to consider. These factors include the location of the property, the condition of the property, and your financial situation.
However, keeping the 70% rule in mind will help you stay disciplined and make wise investment choices to ensure you’re maximizing your potential profits and avoiding losing money on an investment.
Benefits of the 70% Rule
The 70% rule is a great tool to help you make smart decisions when investing in property. Here are just a few of the benefits of using this rule.
- Avoid financial difficulties down the road. If you overextend yourself on the purchase and cannot keep up with your mortgage payments or repairs, you could end up losing your investment property or owing money that may significantly impact your financial stability.
- Keep your emotions in check. It can be easy to get caught up in the excitement of a good deal and overlook some of the potential risks involved. By following the 70% rule, you will be more likely to make sound investment decisions based on logic and reason rather than emotion.
- Maximize your profits. The 70% rule also helps maximize your profit margin by ensuring you only pay close to the end sale price on your purchase. You can ensure you’re leaving enough margin to make a real profit and see the benefits of real estate investing.
- Protect your investment. If you purchase a property for less than 70% of its after-repair value, you will have a built-in equity cushion that can protect you if the market takes a turn for the worse.
- Build credibility. Following the 70% rule in house flipping can also help build your credibility as an investor. If you stick to this guideline, it will show potential lenders and partners that you are a disciplined and responsible investor.
Risks Associated with the 70% Rule
Even though the 70% rule is a great tool that can help you become successful in real estate investing, there are a few risks associated with the rule that should be taken into consideration.
- Missing out on investments. You may miss out on some good investment opportunities if you strictly adhere to the rule. Sometimes, the purchase price may be higher than 70%, but depending on the market, your experience, or the type of property, you could make more than the estimated 30% if you break the 70% rule.
- Does not account for appreciation. The rule does not take into account the potential appreciation of a property over time. Investors should pay close attention to the market and similar houses in the area to ensure all aspects are considered.
- Does not account for other costs. When thinking about the rule, some real estate investors may forget to account for financing costs, closing costs, or real estate agent fees.
- Not suitable for all properties. The rule may not be ideal for some properties, such as those you plan to rent before selling or hold onto for years.
There will be times when it makes sense to pay more than 70% of a property’s after-repair value, and there will also be times when it makes sense to pay less. It is up to you to use your best judgment and make the right decision for your circumstances.
How to Maximize the Benefits and Minimize the Risks
You can do a few things to maximize the benefits and minimize the risks of following the 70% Rule in real estate investing.
- Research. Be sure to do your homework before making any investment decisions. Research the market and the property thoroughly so that you have a good understanding of what you are getting into.
- Consult with professionals. Consult with a professional if you have any doubts about a particular property. A real estate agent or attorney can help you understand an investment’s risks and potential rewards.
Remember that the 70% rule is just a guideline, and there may be times when it makes sense to deviate from it. If you plan on flipping a property for a profit, you may be willing to pay a higher offer price and accept a higher level of risk to make a larger return on your investment for the maximum price.
Learn More About the 70% Rule and Real Estate Investing with Finance is us
Whether or not to buy an investment property should be based on several factors, including your financial situation, investment goals, and your tolerance for risk. Remember that there are exceptions to every rule, even the 70% rule, so use your best judgment when making final decisions about an investment property.
To learn more about the rule and other ways to ensure you make the best decisions on your investments, read more investing articles on our site. Our online resources help investors make the best financial decisions for themselves and their families.
Whether you’re an experienced investor or just getting started learning more about investing and real estate flipping can help you make better financial decisions in the future.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.