If you’re new to flipping houses, you may have heard of the 70% rule but not know exactly what it is. Longtime house flippers used their years of experience to create a quick tool called the 70% rule. This tool helps them quickly analyze a potential purchase to determine whether they should put an offer on the property.
The 70% Rule Explained
Investors want to know what 70% of the home’s after repair value is minus repair costs. That amount gives investors a threshold of what their top dollar number is to acquire a new house to flip. The rule is great if you understand it and know how to use it. However, if your calculations are wrong, it can throw everything off. The amount you plan to offer might be too high to see any profits after repairs are finished and the house is ready to sell.
Many seasoned home flippers recommend that new investors learn how to use the formula and stick to it on their early flips. In fact, they recommend trying to bid even lower if possible. The reason for this is to make up for some of the potential expenses you don’t know about yet. Experienced flippers know what hidden costs are likely during the rehabilitation process. They know about the pitfalls and can be more competitive when buying a home. Without the experience to know what pitfalls can occur, you could bid too high and ultimately not make any profit.
Calculating a Home Price Using the 70% Rule
To better understand how the 70% rule works, look at some examples of calculations. Start with a house that has an after repair value of $200,000. You would begin by multiplying $200,000 by 70%, which gives you $140,000. Next, you would subtract all your costs to renovate and repair the home. Don’t forget costs like having the floors or carpets removed, old appliances taken away and discarded, etc. Assume that you also had a home inspection done, so you know there aren’t massive problems with the home. Taking all that into account, you come up with a figure of $40,000 for repairs. You then subtract the $40,000 in repair costs from $140,000, which means you should pay no more than $100,000 for this home.
When Does the 70% Rule Not Work?
There are definitely situations where the 70% rule won’t help. Watch out for rental markets as you will be competing against landlords. These buyers know the market well and how to do just enough rehab to get it ready for renting out. They won’t have the same costs you do as a flipper. That gives them the advantage of buying homes for more money and holding on to them longer.
You need to know your market and the after repair value of the area you’re in. If you don’t calculate your rehab costs correctly, it could mean the difference between making a profit or being upside down. The 70% rule won’t help you much in a neighborhood where homes aren’t selling. In that situation, it doesn’t matter what percentage you use if the home won’t sell. The same applies in a rough neighborhood with high crime rates. You may not be able to flip a house for much more than you paid for it — even if it’s the best house in the neighborhood.
You also need to consider who your buyer will be. You can get the house for the right price using the 70% rule, but it won’t matter if you are marketing in the wrong area. Don’t go for the sleek bachelor pad far out in the suburbs where it’s mostly older residents or established families. You could wind up not making any profit, even if you followed the 70% rule.
Always remember, the 70% rule is a guideline; it’s not set in stone. In some situations, buying a house at 30% of the after repair value still results in a loss because the home needs significant repairs. In other situations, you might pay 85% of the after repair value and end up making money because the home didn’t require much work.
Getting the Right Funding For Your Home Flip
If you’re looking to get into flipping homes, you need to secure the right funding. You need to have the money on hand to snag a great deal once you calculate your offer price using the 70% rule. You don’t need a traditional mortgage for a house flip, so what lending options are available? Consider a house flipping loan from Titan Funding to help you get the next home you need.
What Is a House Flipping Loan?
Known as fix and flip loans, these are popular tools for investors who need that added flexibility to get the best deals fast. It’s no secret that flipping homes are high-risk, something most traditional lenders don’t want anything to do with. Lenders have to evaluate all risks when deciding to approve a loan. A house flip loan is risky due to unpredictability in the housing market and the extra costs associated with a flip. Some commercial lenders offer specific fix and flip loans that address the risks while meeting real estate investors’ needs.
How House Flipping Loans Differ From Traditional Mortgage Loans
A house flipping loan is a short-term loan. It is much shorter than the usual 15- or 30-year loan you get when buying your family home. They can have adjusted terms depending on the lender, and there are no pre-payment penalties, unlike some home loans. House flipping loans usually have higher interest rates, sometimes double what a conventional mortgage offers. Most flippers pay off the principal quickly to reduce the interest they pay. Closing times are significantly shorter with a house flipping loan. Instead of maybe a 30-day close with a conventional mortgage, you’re looking at up to seven days. Finally, mortgage lenders are primarily concerned with your credit score, employment history, income levels, etc. House flipping lenders are more concerned with the property and your ability to improve it and flip it quickly.
If you’re considering a house flip, securing the right financing first is crucial. By using the 70% rule, you can quickly figure out how much you need to borrow and what your possible return on investment will be. Once you are ready to proceed, let Titan Funding help you get the house flipping loan you need. Contact us today to learn more about these loans and how our services can help.