How to Flip a House: What is the 70% Rule in House Flipping

House Flipping Guide: Understanding the 70% Rule in Flipping a House

Conshohocken, United States - September 1, 2023 / Fairmount Funding - Private Lending for Real Estate Investors /

Reality TV stars that show how to flip a house make it look so easy to turn a run-down property into something appealing and earn a huge profit from it. However, undertaking a house fix and flip project demands dedication and financial commitment, in stark contrast to the brief and glamorous 30-minute segments often portrayed on TV shows. Not only is there an initial investment in the property itself, but also the considerable expenditure of time, effort, and money required to carry out essential improvements.

The key to a successful house flip is buying the property at a low price so that you can make a big profit when you sell it later. Spending too much when you buy the house can make it hard to earn back your investment, let alone make a profit. Thats where the 70 percent rule comes into play. Well explore how this rule operates and how it can set you up for a successful flip.

Getting Started on How to Flip a House

House flipping can take different forms: one approach involves purchasing a fixer-upper and renovating it to make it suitable for the market, while another strategy involves holding onto the property until it can be sold for a higher price. In both cases, the objective remains the same to buy at a low price and sell at a higher price, generating a profit within a relatively short time frame, often within months or a year.

Here, well mainly focus on the fix and flip strategy where house flippers take properties that most homebuyers arent able or willing to renovate and improve them to the point where they meet buyer demand.

But before learning how to flip a house, careful preparation is essential. It isnt something that can be taken hastily or accomplished overnight. Here are some of the things you need to consider before you get started:

• Educate Yourself: Start by learning about the real estate market, property values in your target area, local regulations, and the process of buying, renovating, and selling houses. There are numerous books, online resources, and courses available to help you gain knowledge in this field.
• Set a Budget: Determine how much capital you can invest in a house flip. Consider not only the purchase price of the property but also the renovation costs, holding costs (such as property taxes and insurance), and selling expenses.
• Find the Right Property: Look for distressed properties or those with the potential for improvements. Browse through foreclosures, auctions, and short sales to identify properties that align well with your budget and renovation capabilities. Consider factors such as location, market demand, and the estimated after-repair value (ARV) of the property.
• Create a Business Plan: Create a detailed business strategy that includes your objectives, timeframe, and tactics for acquiring, renovating, and selling homes. A solid plan will assist you in remaining focused and organized throughout the procedure.
• Secure Financing: To fund your flip, look into numerous financing sources such as traditional mortgages, hard money loans, or private investors. When deciding on the best solution for your scenario, keep interest rates and repayment terms in mind. Fix and flip financing is available to most with no prior experience required and up to 100% of the renovation cost.
• Renovate Wisely: Plan renovations that are in line with market demand and will provide a good return on investment. Focus on necessary repairs and upgrades that add value to the property without going overboard.
• Market Effectively: When its time to sell, use online resources or a real estate agent to successfully advertise your home. A competitive asking price and appealing staging can assist in drawing in potential buyers.
  
  

What are the common mistakes to avoid when you are new to house flipping?

Flipping houses, like any small business, demands a significant investment of time, money, planning, and patience. It involves skill and hard work, often turning out to be more challenging and costly than anticipated. Approaching it casually or with the sole intention of getting rich quickly can lead to serious financial consequences. To ensure a successful venture, steer clear of the following mistakes if youre considering house flipping:

• Overestimating Profit Potential: One of the most frequent errors is overestimating the potential profit from a flip. Be realistic with your fix-and-flip formula and consider all costs, including purchase price, renovation expenses, holding costs, and selling expenses.
• Underestimating Renovation Costs: Failing to accurately assess the costs of renovations can lead to budget overruns and decreased profit margins. Get detailed quotes from contractors, consider potential unforeseen expenses, and reference a guide on flipping houses to better familiarize yourself with the hidden costs of flipping property.
• Insufficient Time: The process of flipping a house takes a lot of time and consideration. The search for the ideal house can take months, and renovations can take much longer. If you manage construction or closely supervise contractors in addition to working a day job, you must sacrifice personal time. Hiring employees will result in more expenses and a lower profit overall. Planning inspections to fulfill building code requirements after the modifications may result in additional costs and delays. No matter whether you manage showings yourself or hire a real estate agent, selling the home can also be a major time sink.
• Lack of Expertise: Skilled professionals and builders often know how to flip a house and they usually do it as a side income. The real money comes from sweat equity. If youre handy with renovations, you have the skills to flip houses.
• Not Enough Knowledge: To succeed in house flipping, you need to pick the right property at the right price in the right location. Making informed renovation decisions is key, as well as understanding tax and zoning laws. Knowing when to cut your losses and move on is essential to avoid a money pit.
• Low Tolerance: House flipping can be unpredictable, and unexpected challenges may arise. Stay patient, adapt to changing circumstances, and be prepared for any setbacks. Take your time to thoroughly evaluate a propertys potential and market conditions before committing to a purchase. Dont rush through the process when renovating, and understand that buying and selling houses takes time.
  
  

The 70% Rule: What is it and How it Works

The 70% rule is a commonly used house-flipping formula in real estate. It provides a simple and quick way for real estate investors to estimate the maximum price they should pay for a property to ensure a profitable flip.

The rule states that an investor should not pay more than 70% of the after-repair value (ARV) of the property, minus the estimated repair costs. Heres how the formula looks:

Maximum Purchase Price = (ARV x 0.70) Repair Costs

The 70 percent rule in house flipping is used as a conservative approach to ensure that the investor has a sufficient margin of safety and room for unexpected expenses. It allows for a buffer to account for potential miscalculations, market fluctuations, or any unforeseen issues that may arise during the renovation process. Lets go through a simple example to illustrate the 70 percent rule in real estate.

• After-Repair Value (ARV) Estimation: Lets assume that comparable properties in the same neighborhood have recently sold for an average of $300,000 after being fully renovated.
• Estimated Repair Costs: Based on a thorough assessment of the property, the investor determines that the necessary repairs and renovations will cost approximately $40,000.
  
  

Now, lets apply the 70% rule to calculate the maximum purchase price the investor should consider:

• Maximum Purchase Price = (ARV x 0.70) Repair Costs
• Maximum Purchase Price = ($300,000 x 0.70) $40,000
• Maximum Purchase Price = $210,000 $40,000
• Maximum Purchase Price = $170,000
  
  

According to the 70% rule, the investor should not pay more than $170,000 for this property to ensure a potentially profitable flip. If everything goes according to plan, the estimated return on investment (REI) will be at $90,000. But the 70 percent rule only serves as a principle, not a guarantee. There might be hidden issues that add another $10,000 to the repair costs, or the market price might go down and you can only sell the property at $280,000. However, the purchase price of $170,000 leaves a sufficient margin to cover the repair costs and still have a decent profit after selling the property at its estimated ARV.

Remember that this is a simplified example, and real estate investment involves various factors and risks. The accuracy of the ARV estimation and repair costs plays a critical role in determining the success of the house flipping project. Additionally, market conditions, location, and other factors must be carefully considered before making an investment decision.

How to Flip a House Without Money

Lets clarify one thing: flipping houses with no money is one of the biggest mistakes in this venture, but learning how to flip a house without money is achievable. Theres a supportive community of investors eager to provide the necessary funds for your first deal. Show them youre deserving, and theyll be willing to back you financially.

Nowhere does it state that an investor must use their own money to fund a deal? Todays investors have access to various funding options that do not require personal capital. Using debt to flip a house can be a worthwhile strategy for several reasons, and fix and flip loans are specifically designed to finance such projects. This loan, in particular, offers a structured and accessible means of financing such projects, enabling investors to leverage other peoples money, preserve personal capital, and potentially achieve higher returns on their investments. Utilizing other peoples money is often considered the preferred approach for real estate investment. Private lenders, hard money lenders, and house-flipping investors seeking profitable ventures are all viable sources to explore for your next deal.

How to Flip a House FAQs

How long does it take to flip a house?
On average, the house flipping process takes approximately four to six months, starting from the purchase date until the sale of the renovated home. However, its essential to note that each project varies, with some completed within a month or so, while others demand more extensive work and may extend beyond the typical timeframe.

What can I do if my offer using the 70% rule is rejected?
The 70% rule doesnt work in every market. In a sellers market, you might need to offer up to 85% of the homes ARV minus renovation costs. Market conditions should guide your pricing strategy, not just the 70% rule. In a buyers market, offering lower prices may be necessary, even if the rule suggests higher ones.

Is there a chance that the 70% rule will not work for me?
The 70% rule may not be suitable for everyone, as it primarily caters to investors focused on renovating and quickly flipping homes. It works best in neighborhoods with abundant comparable sales to estimate an accurate after-repair value.

However, if your goal involves purchasing and holding a property for an extended period, like renting it out and waiting for its value to appreciate, the 70% rule may not be as effective. Predicting a homes future value is challenging, and without a reliable after-repair value estimate, the rule loses its relevance.

House Flipping Secrets: The 70% Rule and Smart Financial Planning

Flipping houses can be profitable, but it comes with risks for new investors. The 70% rule can guide you on how much to spend on a property to make a profit upon resale. Before diving in, understand the house flipping process and associated risks. Treat the 70% rule as a rule of thumb, conducting thorough research on the neighborhoods average sales prices and renovation costs.

But before jumping on how to flip a house, ensure you have your finances in order. Explore various home loans for financing investment properties, such as fix and flip loans and multi-family rehab loans. Additionally, consider personal loans for home-related renovations, but make sure to compare interest rates and terms with home loans before making a decision. A well-prepared approach will increase your chances of success in the house flipping market.

KEY TAKEAWAYS

• The 70 percent rule is a guideline, not a strict rule, but its important to avoid overpaying for a property to maximize potential profits in house flipping.
  
  
• House flipping requires substantial investments in time, money, planning, and patience.
  
  
• You can begin investing without using your own money.

Contact Information:

Fairmount Funding - Private Lending for Real Estate Investors

500 Fayette St. #202
Conshohocken, PA 19428
United States

Max Fisch
(215) 515-6966
https://fairmountfunding.net