In house flipping, you may have heard of the 70% rule. Or you might just be wondering about how much you should invest in your next property. The 70% rule isn’t a hard-and-fast rule, but it’s excellent guidance.
What is the 70% Rule?
In short, you should never invest more than 70% of the property’s after-repair value — less any repairs that may be needed.
Let’s take a look at this in practice.
You have a property that you think you could sell for $160,000. But it needs about $30,000 worth of repairs. That leaves $130,000 — the amount of money that you would net. You should not buy the property for more than $91,000. If you’re completely correct and sell the house for $160,00, you’ll have made $39,000.
The 70% rule doesn’t, however, tell you that you will make $39,000. It provides a buffer. Many projects don’t go exactly as you’d expect. Because of that, you need to compensate and make sure you’ve left yourself enough space for delays.
Should You Always Follow the 70% Rule?
The 70% rule isn’t always used by professional house flippers or professional renovators. Many experienced professionals simply run the numbers and see if the property is profitable to them.
In the above example, let’s say that those $30,000 of repairs were pretty minor repairs and you were certain that you could complete them under budget and that you could complete them within a month. In that situation, $39,000 is a pretty hefty buffer.
Alternatively, let’s say that you thought those $30,000 repairs might spiral, or you were uncertain about the property and its real value. You might bid much, much lower to leave space for that uncertainty.
Over time, most professionals start to develop a feel for what they can borrow for a house. But the 70% rule is a great rule of thumb for those who are starting out or for those who just want another metric to consider. Following the 70% rule is going to be safe for most projects. And when it comes to house flipping, you want to be safe.
Do Lenders Use the 70% Rule?
Lenders use different rules. For the most part, lenders will lend up to a certain amount of the future value of the property. So, if they think the property will be worth $160,000, they may be willing to loan a percentage of that. But you will need to be able to show that the property could be worth that.
Of course, whether you’re investing 50% or 70%, you need a lender. If you’re interested in getting a loan for your next investment property, contact the experts. Connect with Hard Money Lenders AZ today.