The 70% rule helps homeowners determine the maximum price they should pay for an investment property. Basically, they shouldn't spend more than 70% of the home's value after repair minus the costs of renovating the property. The 70% rule states that an investor must pay no more than 70% of the post-repair value (ARV) of a property minus necessary repairs. The ARV is what a home is worth after it has been fully repaired.
Moving home, when done correctly, can be an extremely lucrative way to generate market-beating profits in a very short period of time. The 70 percent rule equation, while fairly simple, can be somewhat confusing as to what all the numbers mean, so let's break down the formula even further. Along these lines, the weakness of the rule is that novice investors may not know how to estimate rehabilitation costs or value after repair and, as a result, calculated margins can be wildly inaccurate. The rule states that a repair and change investor must pay 70% of the value after repair (ARV) of a property, minus the cost of necessary repairs and improvements.
Earlier I wrote that the 70% fix and flip rule is used as a guide for measuring profitability and MAO. If you run the numbers using the 70% rule and end up with a figure that doesn't match what you expected to win, you can adjust the percentage accordingly and move on from there. As mentioned above, the general objective of the rule is to build a profit margin that can cover all known costs when investing a home, without leaving a sizeable net profit. For this reason, it makes sense to research all labor and repair costs in detail before inserting the final estimated repair costs into the formula of the rule of 70.
The purpose of the 70 financial rule is to calculate how long it takes for an investment to double in value. If you're handy with a hammer, enjoy laying carpets, and can hang drywall, roof a house, and install a kitchen sink, you have the skills to turn a house upside down. If you plan to fix the home and sell it for a profit, the sale price must exceed the combined cost of acquisition, the cost of maintaining the property, and the cost of renovations. Using the rule of 70, you simply have to divide 70 by the interest rate (for example, 8%) to calculate how long it takes for the investment to double in value.
Trying to use a general rule on each property will result in fewer offers being accepted, simply because their offers will be out of step with the market, while other investors have adapted. The 70 percent homechange rule is a guide to quickly measure what an investor should offer in a potential property, packaged in a compact and simple formula. Depending on the value of the home and the usual transfer costs in the county in which you are investing, this formula often results in a profit of around 15% for the investor.
