70 Percent Rule

What it is

The 70% rule is — it’s not really that great. I’ll say that up front. It’s a method for quick calculation, nothing more.

Here’s how it works. Say you have a house with a $300K ARV. Take 70% of that and you get $210K. Now subtract the rehab. If the rehab is $50K in this case, $210K minus $50K equals $160K. That’s what you should purchase the house for.

Is that perfect? No, it’s not even close to perfect. But it gets me a way to give a quick offer on a house.

Why it matters

I think wholesalers use this more than actual house flippers do. A lot of wholesalers don’t know about houses. The main wholesaler usually knows, but they hire people who don’t have the same experience to go get deals, and those people need a way to make offers that aren’t going to get the main wholesaler in trouble. That’s where the 70% rule really comes into play. I’ve even used it for that exact same reason.

Here’s the thing that bothered me about it. Does it figure in holding time? Not really. The 30% that’s left after you take out the rehab is supposed to cover everything else — closing costs, interest costs, real estate fees, utilities, insurance, property taxes. Is it perfect? No. Somebody’s insurance is more than somebody else’s. Somebody’s property taxes are more than somebody else’s. Utilities, who knows? Real estate fees, interest rates — you might have a great interest rate. Heck, you might be buying cash.

That’s why I made the Flippin’ Calculator. It breaks things down a little bit further than just the 70% rule — rate of return on the actual cash in the deal, interest rate, points on the loan, hold time. Under basic conditions (12% interest, 4% points on the front end, 6 month hold, 15% rate of return) you get numbers dang close to the same numbers as the 70% rule. Under different conditions, you don’t.

How it shows up

This is a decision-making speed tool. Wholesaler sends you a house, you want to say yes-or-no in 30 seconds before you waste another hour on it. Run 70% of ARV, subtract rehab, see if the asking is anywhere near that number. If yes, dig in. If no, move on.

Same deal with the 1 percent rule for holding rentals. Pocket rules like this get you in the ballpark. They’re not the end all be all. They’re to make decisions quickly. You always start at making decisions quickly and then you’re going to move down the pipeline and start to refine things a little bit further.

Related

arv, max allowable offer, rehab budget, holding costs, 1 percent rule, equity gap