The 70% rule is a guideline used by real estate investors and lenders to determine the maximum price that can be paid for a property being flipped. The rule states that the purchase price of the property, plus the cost of renovations, should not exceed 70% of the property's after repair value (ARV).
Here's how the 70% rule works:
Determine the property's after repair value (ARV): This is the estimated value of the property after the renovations have been completed.
Calculate the maximum purchase price: Multiply the property's ARV by 70% to determine the maximum purchase price that can be paid for the property.
Calculate the maximum budget for renovations: Subtract the maximum purchase price from the property's ARV to determine the maximum budget for renovations.
For example, if the property's ARV is $200,000, the maximum purchase price that can be paid for the property according to the 70% rule is $140,000 (200,000 x 0.70 = 140,000). This means that the maximum budget for renovations is $60,000 (200,000 - 140,000 = 60,000).
The 70% rule is a general guideline and may not be applicable in all cases. It's always a good idea to carefully consider the specific circumstances of the property and the market conditions before determining the maximum price to pay for a flip.