Is the 70% Rule Too Aggressive in High-ARV Markets?

[Francisco Feliz]

Hi BP,

I am currently based in the Greater Boston area, considered by many reports to be the second most unaffordable real estate market in the country. Just like anywhere, finding deals isn't easy, but the question I have for you is if abiding by the sacred 70% rule increases said difficulty unnecessarily. 

One of the arguments I've heard is that, mathematically, the formula just doesn't make sense once you get past a certain level of ARV because rehab costs don't have a linear relationship to ARV. So, if you are looking at a $200K ARV and a $600K ARV home, the kitchen in the latter is not 3x more expensive than that in the former, which is what is implied by a static ratio like the formula. However, the great counter that I've been given to this is that this argument is invalid because the 70% rule does not use renovation costs as a % of acquisition/sale, so the repairs are actually accounted for correctly.

Long story short, where do folks stand on this? Can I hear a few different views on what's a more reliable way of analyzing deals? Should it just be 80% instead, which allows for the expensive reality of the high-priced market, but still makes finding deals more feasible? Would you strictly avoid going above 70%? Would love to gather the inputs of as many who have gone through this exercise as possible - maybe you've changed your flexibility over time or maybe you've gotten burned when you did? Would love to learn from you all.

Thanks, BP!

Francisco