Landlord Studio 70% Calculator
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The 70% rule states that an investor should pay no more than 70% of the ARV (after repaired value) of a property. This is a commonly used rule that investors use to judge whether or not a property is worth buying for a flip and how much they should offer for the property.
Example of what this means:
To give a better sense of what this means in practicality, we thought it would help to run through an example:
On paper, this looks like a fantastic deal, however, you have to remember that there are a lot of associated costs that come with a fix and flip. We will explore a few of those costs later.
The 70% rule is a great way to get a quick estimate. However, it’s worth noting that it’s not the final number. In general, we use the 70% rule as a starting point, it’s a quick and easy sum to do to see if a deal is viable.
If the numbers work with the 70% rule we will normally do a deeper dive into the numbers and costings to get a more precise upper estimate for our purchase price.
Let’s break down what that would mean:
If we aim for a $25,000 – $35,000 profit for this flip which isn’t unreasonable, then the numbers look like this:
As you can see that comes out pretty close to the 70% rule.
These are all estimates, and on a real deal, we’d do extensive research into a property to determine as accurately as possible each of these numbers.
The 70% rule is generally pretty close to the money. However, it’s always worth thoroughly investigating your costs, and working with the lowest number that you come up with. What you don’t want is to be caught out by surprise because you forgot to include an expense. The rule also changes with more expensive investment properties as the cash reward is what we are generally after as supposed to a percentage of the ARV. For example, on a $1.5m house these figures will look a bit different.
If you can get the property for less that’s great. We would never rely entirely on any generic rule like this, but in our opinion, the 70% rule is a great starting point for beginners who may not know every associated cost or be able to estimate those costs accurately.
The after repaired value is key to getting a good estimate. You can’t guess on the value of the property. Not knowing the ARV is a sure-fire way to get yourself into a whole world of trouble.
You need to be able to reasonably accurately predict the costs of the work that will need to be done on the property to bring it up to market value. Repairs almost always cost more than expected with previously unseen and potentially expensive issues arising during the renovation processes.
These are the two main things that are vital for using this rule however there are other considerations that you to take into account to get the most accurate estimates for the purchase price and predicted profits that this rule ignores.
These costs can all vary widely depending on your location and the property. Which is why to get into the numbers and write out all your expenses in detail to avoid any financial surprises!
It’s worth noting that even in a competitive market like we are in today, there is little room for compromise on the numbers. Don’t get tempted to pay more to make a deal work, but that is how a lot of people get into a lot of trouble. That does not mean you always have to stick to the 70 percent rule but do not change your investing style just because it’s hard to find deals. You should be able to find deals in almost any market if you know what you are doing.
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