The 70% Rule and Why You Should Break it 100% of the Time
If you’ve spent much time studying the business of real estate investing, specifically fixing and flipping houses, then you’ve probably heard of the 70% rule.
It goes like this…
If the after repair value (ARV) of a distressed home is $100,000, then you should never pay more than $70,000. In other words, your purchase price should not exceed 70% of the ARV.
This is what “they” call the 70% Rule.
I’m not sure who “they” are, but “they” are wrong.
The 70% rule for fixing and flipping houses is dumb, and you should break this rule 100% of the time.
I’ll explain why in a few paragraphs, but first…
Rules Are Meant to Be Broken
Back in February 2013, I posted a video on our sister website’s YouTube channel (FlippingPhoenixHouses.com).
The title of this video is PROJECTED PROFIT VS. REAL PROFIT IN FLIPPING HOUSES.
Here’s the video:
I posted it in response to all the reality TV shows airing at the time, several of which used “projected” profit figures instead of real, or NET profit numbers.
Even though it’s over 4 years old, this video has almost 32,000 views, and I’m still getting comments on it. A few days ago, a commenter roasted me for not using the 70% rule for buying the distressed properties I used as examples.
Never mind we made $94,000 in two months on these deals. We paid too much for these houses! We broke the rule!
Why the 70% Rule is Dumb
I explained to the commenter that we’ve made money paying 86 cents on the dollar for houses we’ve fixed and flipped, and we’ve lost money paying 30 cents on the dollar for houses we’ve fixed and flipped.
How is this possible?
Two words: rehab budget.
Think about it…
If you buy a distressed property with an ARV of $100,000, and it only needs $5,000 in rehab, then can you pay more than $70,000 for it and make a profit?
On the other hand, if you buy a distressed property with an ARV of $100,000 and it needs $25,000 in rehab, and you pay $70,000 for it, will you make a profit?
Of course not!
That’s how we’ve made money paying 86%, and have lost money at 30%. The rehab budget is the key. If you know how to accurately estimate your rehab costs then you can purchase, and profit from, deals other investors that follow the 70% rule will overlook.
More importantly, you’ll pass on deals these same investors will buy because they think they’re getting a great margin at 70% of ARV.
To see a couple of real-world examples of how you can make money paying more than 70% of ARV, and lose money paying less, check out this video: