70% Rule 

When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property’s current or potential financial performance, helping investors gauge profitability and mitigate risks. The 70% rule is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures.  

What is the 70% Rule? 

The 70% rule is a guideline followed by many investors who flip or rehab houses. The rule states that you should never purchase a property for more than 70% of the after-repair value (ARV) minus the estimated repair costs and any extra profit required. This sets house flippers up for larger profit margins after renovations are completed because the upfront cost of the property is lower.  

This rule is meant for homes in need of major renovations, like entirely new flooring, roofing, and appliances. Because they need to be remodeled, which requires a higher budget, you’ll need a lower purchase price to offset this. Flipping homes involves a lot of work and risk, but the payoff can be substantial. 

70% Rule Formula 

The formula used to calculate the 70% rule is as follows: 

Maximum purchase price = After-repair value * .70 – (Cost of required repairs + Extra profit required)  

As you can see, the maximum amount you should spend on a property you plan to flip is calculated by multiplying the ARV by 70%, then subtracting the required repair cost and extra profit required (if you plan on bringing in more profit than the 70% rule provides). We’ll explain the details of each of these numbers shortly. 

When to Use the 70% Rule 

The 70% rule should be used when evaluating the potential purchase price of a property you plan to flip. Purchasing a property comes with no small number of costs (including closing costs and fees for a real estate agent), but the price of the house is the largest. It’s financially smart to calculate and offer the best deal possible, especially if your usual investments are in flipping and selling houses for a profit.  

If you’re not sure if a home is listed at a good price, use the 70% rule to calculate if it’s over or under the maximum purchase price for the specific property. Then, you’ll be prepared to make a deal, offer a lower price, or walk away entirely.  

How to Use the 70% Rule Calculator 

Using a 70 percent rule flipping calculator can help you quickly determine the maximum amount you should invest in a house-flipping property to achieve a minimum profit margin before you finalize a deal. If a home’s price is far above your 70% maximum price, you have a tool that helps you decide which properties are worth your time and which you should move on from. 

Let’s discuss how to use the 70% rule calculator works, including what inputs you’ll need and how to interpret your estimated purchase price. 

Inputs 

Here are the inputs you’ll need to use our 70 percent rule calculator: 

1. After-Repair Value (ARV) 
2. Cost of required repairs 
3. Any extra profit required 

After-repair value (ARV) is the estimated worth of the property after all your renovations and remodeling are completed. To find your ARV, be sure to research the property’s neighborhood and the selling price of other comparable homes in the area. You never want to overestimate your ARV — this can lead to a major loss in profits later. 

The cost of required repairs is just what it sounds like: the money you’ll need to execute your renovation plan. You’ll need to estimate how much changes like new flooring, railings on the stairs, or paint in a bedroom will cost, then input that total into the calculator to be subtracted from your ARV. 

Any extra profit required is a number that depends on your goals and expected profit. It’s not a necessary step, but if you want to be aggressive in your sale price to increase your revenue once your flip is finished, any extra profit you’d like to make should be factored into the 70% rule. 

So, let’s put these inputs together. If your ARV is $550,000, your required repair costs are $60,000, and your extra profit is $0, then you would multiply $550,000 by 70% (which is $385,000) and then subtracted $60,000.  

Outputs 

After you’ve entered the above inputs, the 70% rule calculator outputs the following: 

• Estimated/maximum purchase price 

The estimated/maximum purchase price is the most you should agree to pay for a property you plan to flip and re-sell. Depending on the market, you should try to stay at or under this number to maximize your profits. 

Using the previous example, if you multiply $550,000 by 70% (which is $385,000) and then subtract $60,000, your total will be $325,000. The maximum amount you should spend on that property is $325,000, so if it’s listed at $400,000, you could either attempt to get the seller to lower the price or choose a different property with a lower listing price. 

How to Interpret the 70% Rule 

The 70% rule won’t give you a “good” or “bad” output, but rather an estimate of a price for a worthwhile deal. It’s not meant to be a solid limit on the amount you should spend on a property (if you spend 75% rather than 70%, your investment won’t necessarily crumble to the ground), but it’s instead a good rule of thumb to follow when evaluating a potential purchase. 

Keep in mind that the real estate market is always fluctuating, and depending on whether it’s a seller’s or buyer’s market, you may be able to pay 60% or may have to even offer 80%. Research your current market before making any offers or signing any deals. 

Conclusion 

The 70% rule is a key tool for real estate investors and an extremely useful indicator of the maximum purchase price you should offer on a property you plan to flip. By using Innago’s 70 percent rule calculator, you can learn about better offer prices and more profitable deals on your next house flip.