Any investor considering the purchase of distressed real estate must understand the 70 percent rule, especially when the transaction includes a fix-and-flip loan. Utilizing a simple formula will enable people to ascertain whether a property is potentially profitable.
Applying the 70 percent rule involves figuring out the after-repair value (ARV) and estimated repair costs (ERC) of a house before purchase. For optimal results, these numbers must be accurate for a local area, and they must also be conservative. For a hypothetical calculation, use $50,000 ARV and $10,000 ERC – 50,000 * .7 – 10,000 = $25,000 as the top buy-in amount for a property.
Remember, unique real estate markets can affect the percentage used for the 70 percent rule. An inflated real estate market might require increasing the percentage up to 80 or 85. A more affordable market will calculate correctly using a lower number.
Approach a fix-and-flip loan cautiously to ensure the biggest profit and a successful exit strategy.