Investing in real estate can be an enjoyable and profitable venture, but like many risky endeavors, it comes with a fair share of uncertainties. That's why experienced investors use various strategies and tools to help them make the right decisions. One valuable tool is called the 70% rule.
Today, we'll take a closer look and find out what the 70% rule is, see how it works, and discover why it's an essential tool for real estate investors. Whether you're a seasoned house flipper or just starting, this post will provide valuable insights to help you make smarter investment decisions.
How Using the 70% Rule Maximizes Profit
The 70% rule is a guideline used to estimate the maximum purchase price an investor should pay for a property based on its ARV, or after-repair value—the projected value of a property after it has been repaired or renovated. ARV is a critical factor for investors when deciding whether a property is worth their investment.
According to the 70% rule, investors should aim to purchase a property at a price no greater than 70% of its ARV minus the estimated repair costs. By following this simple formula, investors can ensure they leave enough room for unexpected expenses, mitigate risks associated with the investment, and, of course, make a profit.
How to Use the 70% Rule for Home Investors
Let's say a property you are considering purchasing has an ARV of $200,000, and the estimated repair costs are $20,000. Using the 70% rule, the maximum recommended purchase price would be $120,000, or $200,000 x 70% - $20,000.
Save this formula for later:
(ARV x .7) - Cost of Repairs = Maximum Recommended Purchase Price
However, it's important to remember that the 70% rule is a general guideline and may not apply in all situations. Buyers must consider other factors, such as the home's location, market conditions, property conditions, and individual investment goals.
How to Calculate ARV
Since the 70% rule hinges on the after-repair value of a home, consider these tips to calculate this vital variable effectively:
Compare other properties in the area and research the local real estate market.
Calculate the cost of repairs.
Consider the property's unique features.
Compare other properties in the area and research the local real estate market.
You can start by looking at recent sales of similar properties in the area. This information can give you a good idea of what buyers will pay for properties in that location. You may also choose to consult with real estate agents or appraisers in your area to get a more accurate estimate of the property's value.
Calculate the cost of repairs.
You'll need to estimate the cost of all necessary repairs and renovations to bring the property to its total market value. To do this, you can consult with contractors or other professionals to get accurate estimates of the cost of labor and materials.
Consider the property's unique features.
For example, if the property has a large backyard or a pool, it may be worth more than other properties in the area. Similarly, if the property is in a desirable location or has a unique architectural style, it may be worth a higher price. By considering these additional factors, you can get a more accurate estimate of the property's actual market value.
Minimizing Risks by Using the 70% Rule
The 70% rule is a valuable tool for real estate investors who want to maximize profits while minimizing risks. By using this rule, investors can ensure that they are buying properties that have the potential to generate significant returns.
However, it's important to remember that the 70% rule is just a guideline—not a hard and fast rule. Ultimately, investors should conduct thorough research and consider all relevant factors before making investment decisions.
At The Mortgage Minds Group, we are here to help you through the home-buying process. We have loan programs specially designed for investors, home flippers, and property owners. Contact our trusted team to find out which special mortgage solutions you qualify for.
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