let’s talk : THE 70% RULE
Hey Guys!
Happy September! HOW IS IT SEPTEMBER ALREADY!? This year is FLYING by. Right now, one of the things I am focusing on is a listing I have in South Philly. This is a project of another investor that is about 90% done and needs a little TLC to get it over the finish line. This sale includes ALL of the materials to get it there and the after repair value (ARV) comps are rising by the week, so we priced it with that in mind. I had some pushback from a potential buyer that he wanted it for less (of course, I get it, we all want the best deal) and his argument was that he wanted it to fall in line with the 70% rule. So I want to dedicate today to talking about what the 70% rule is and if it is always advantageous to follow. Seriously, I had not thought about this rule since before I even started investing. It is a concept that groups like Biggerpockets had preached about and I read about religiously before taking action, but have not thought twice about since I started investing 3 years ago, so I wanted to dive into it again.
So, as we do, let’s talk Real Estate, let’s talk THE 70% RULE…
What is the 70% Rule?
“The 70 percent rule states that an investor should pay 70 percent of the ARV of a property minus the repairs needed. The ARV is the after repaired value and is what a home is worth after it is fully repaired.”
I will use my listing as an example.
ARV = $330,000
Repairs Needed = $20,000 (tops) – this is just for labor because again we are including all of the material costs in the sale
70% * $330,000 = $231,000
$231,000 – $20,000 = $211,000
$211,000 would be what you would be willing to purchase the home for under the 70% rule
Hypothetically, if you purchased it for $211,000 and put $20,000 in to it, you would be making a profit of $99,000 which is an AWESOME deal.
Because it is so awesome, it is not something you see very often. Especially in a growing market like Philadelphia.
When is the 70% rule used?
This rule is used by investors who intend to quickly flip or BRRR (buy, rehab, rent, refinance, repeat) a property. No need to follow this rule if you plan to purchase and rehab your personal home because you typically will own it long enough to experience natural market appreciation (unless you buy at the top of the market).
In my personal opinion, this rule only makes sense if you 100% intend to BRRRR and even then it is not totally necessary – here is why. Most refinancing situations nowadays allow you to pull out 75% – 80% of a property’s equity. So hypothetically you could go all in at 75% of the property’s ARV and still pull all of your cash out. If you intend to flip a property, and follow this rule to a T, you may lose out on a ton of opportunities to earn $$. Let’s look at this through real numbers.
I will use my listing as an example here again.
ARV = $330,000
Repairs Needed = $20,000 (tops) – this is just for labor because again we are including all of the material costs in the sale
Listing Price: $239,000
$239,000 + $20,000 = $259,000
$339,000 ARV – $259,000 total project cost = $80,000
$259,000 / $330,000 = 78% which is way higher than the 70% rule BUT it could still net me an $80,000 profit…. why would I want to pass that up?!
Overall, I think the 70% rule could be a good guideline to use to check your numbers against, but I do not believe it is a hard and fast rule an investor must follow in order to succeed. What are your thoughts? Do you follow the 70% rule?
Now that I have used the two above examples regarding this listing, I couldn’t not end today’s post without marketing it a bit more. So for all of my fellow investor’s on here, I have included the details of this property below. The seller is VERY motivated so let me know if you are at all interested!
Address: 937 Cantrell St Philadelphia, PA 19148
Listing Price: $239,000
ARV: $330,000
Property Description:
Come put your finishing touches on this home! This home features 2 bedrooms, an office, 1 full bath and 2 half baths throughout. Property is 90% complete with new framing, electrical, plumbing, flooring, windows, a mini split system, and a full bath almost complete. A space is framed out for a gas fireplace in the living room creating the ultimate cozy feel. State of the art kitchen appliances, white shaker cabinets and quartz countertops are INCLUDED in the sale and ready to be installed. Basement has washer/dryer hook-up, utility sink and room for a half bath PLUS a living space. Pick this property up for your next flip, rental or to use as your own home! ARV is $330k and rising rapidly.
Link to Listing
HAPPY WEDNESDAY!
Erin
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Data Sources for Today’s Content:
Me – This is based on my own personal experiences & opinions
https://www.rockethomes.com/blog/home-buying/70-rule-real-estate
https://www.realestateskills.com/blog/what-is-70-rule-in-house-flipping
