Real estate investing means you need to make a good profit while selling a great product. The problem many new real estate investors find is that it's often tough to know how much to offer on a new property. The good news is that you can always use the 70% rule. Don't worry, the 70 percent rule flipping calculator is always there to help you out.
The Definition Of The 70% Rule of Home Flipping
The 70% rule is a way that investors can determine if they can turn a profit on an investment. Will the time and effort be worth their money? Will they make a big enough profit? No one wants to be in the position where they lose money on a property. The rule states that an investor should only pay 70% of the ARV. This means they will only pay a percentage of the After Repair value of a property. Then they subtract the cost of the repairs and improvements that will need to be done. When buying and flipping property or homes, time is of the essence. This equation will help determine if your money fits the value.
Explaining The Official House Flipping Calculator
The 70 percent rule flipping calculator is always there to help you figure out this equation. You always times the ARV by 70% then subtract the repairs needed. This calculator percentage is a guideline, not a hard and fast rule. There are other things to consider when making your final offer. The local market, the exit strategy and the housing type might change these numbers.
The Importance Of Correct Estimates
The most important thing to figure out in this equation is if the investment is worth the return. Many investors make the mistake of thinking the 30% leftover is all going to be profit. This isn't true. That 30% must go towards the purchase, renovation and selling of the property. Think about closing costs, inspections and random fees. The profit is what comes after this. Problems may arise out of the blue with the home or property. Sometimes a home has many issues that no one could foresee. Using your calculations, you should be safe. Don't throw out on offer until you've done your homework. Analyze the comps in the market. Talk to realtors about their opinion of the ARV. After you've figured out your repair costs and ARV, it's time to work backwards to find the perfect offer number. Your profits depend on this decision.
Flipping for Profits
Sometimes you need every little detail to make a decision towards your calculated numbers. If you need a more thorough deal for your analysis, you should include every expense possible. Houses can be a little more tricky than property because it's hard to judge a book by its cover. It might look like it has good bones, but it's another story once you get inside and start working on it. It's best to stay on the conservative side when dealing with houses. Once you get into foundation issues, plumbing problems or areas with mold, your expenses begin to rise. Something you thought was an easy flip turns into a scary project.
Know Your Buyers
If you know the market and have a great list of buyers, you're already ahead of the game. This is because the percentage rule isn't always perfect. It's best used on a shorter time scale when flipping houses. Many times property owners hold on to the property for long amounts of time. Their end goal is cash flow instead of a payout from ARV. If you know your buyers will pay more for a special piece of land, this rule doesn't apply as much.
Issues That Affect Offers
A higher-end of lower-end market may change this rule. You will run into investments where you will need to go higher or lower than usual. When a piece of property or home is in an area with a high crime rate, you might need to lower your percentage. The opposite happens when you're in a “hot” area and know you can get more. Go higher. This is why it's so important to know your market.
Labor And Targets
All deals are not the same. Some require a lot more money and effort than others. Some investors want more profit per deal. If you stumble upon a deal that doesn't involve much work and has a quick turnaround, you should accept it even if you'll get a lower profit margin. You should even get ready to pay more than the 70% rule allows. You can then move on to another investment quickly, so you haven't lost much time even if you haven't made as much money. You're only paving the way for more money in your pocket due to the quick turnaround of the project.
It's important to know your market, but there's always going to be times that you step into uncharted territory. When you invest in an area that's new to you, remember the costs that aren't included in your 70% rule. You should remember closing costs and property taxes in that market. If you don't remember these things, it could mean large error in your final profits.
The One Reason Not To Break The Rules
The economy isn't foolproof. The housing market rises and falls just like the stock market. It's crucial to remember that real estate values don't always rise. Just because you bought in a rising area with big promises doesn't mean the area will appreciate in value. This is why remaining conservative with your numbers is important when making investments.
The Final Thoughts
The 70% Rule in real estate is a great guideline to follow to give you estimates on your return. Before you extend your hand to make an offer, always run a detailed expense analysis. Remember there can be (literal and figurative) skeletons in the closet. Always take into account these things. Investments are a gamble, so your calculations need to be conservative and confident at the same time. Have fun with your investments, and keep moving forward.