Multiply the ARV of the property by 0.7 to determine the maximum price you would pay for that property. When a real estate investor follows the 70% rule, their goal is to buy a property at a fraction of the price for which it could be resold at its market price, after having made the necessary repairs. Because the 70% rule uses such a simple formula, it's a quick and easy way to determine the approximate purchase amount for a property to repair and sell, which is often needed quickly when time is of the essence in the fast-paced world of fixing and changing. If you're trying to determine if a potential property would be a good project to fix and change, the 70% rule is definitely a tool you should have in your back pocket.
While useful, the 70% rule should not be considered the only factor when comparing a property's profitability. While the main objective is to make a profit (30% maximum), the 70% rule will give the investor some room for maneuver to pay unexpected expenses when closing the trade without losing money. Investors can even use 72 instead of 70 in the above calculation, similar to how real estate investors can adapt the 70% rule to their plans and strategies. The 70% rule doesn't work so well if you want to buy a house and keep it for years, renting it out while you wait for it to rise in value.
In a booming market, you may need to modify your calculations to offer a price that is as high as 85% of the post-repair value of a home minus renovation costs. Applying the 70% rule can help you avoid doing so and place yourself in the best position to maximize your profits. The rule states that an investor who fixes and invests must pay 70% of the value after repair (ARV) of a property, minus the cost of necessary repairs and improvements. Investors can calculate the maximum allowable offer according to the 70% rule by multiplying the ARV of a property by 0.7 and subtracting the result by the estimated repair costs.
While the 70% rule is widely used across the real estate world, it's a quick guide and shouldn't be relied on as the last word in determining what you should pay for a property. If the investor does the calculations based on the 70% rule and realizes that the profits are lower than expected, they can adjust the rule to a more acceptable figure. The 70% rule is a general guide that an investor can use to determine if a property would be profitable or not and if it would be worth seeking as a solution. The 70% rule is a basic quick calculation to determine what the maximum price you should offer for a property should be.
Some exit strategies allow investors to buy a property above the 70% rule, while others may force them to be as close to 70% as possible or even lower (such as fixing and changing, which has more associated costs).
