70% Rule

[Rey Delgado]

Hey guys question here, under what circumstances if any should I consider buying an investment property that doesn't fit the 70% rule. Most of the offers I have coming my way from local wholesalers would cost me over 70% of the ARV minus repair cost.

Any tips suggestions, be aware of's would be greatly appreciated!

[J Scott]

It's all just math...

Using 70% math, you can be guaranteed (assuming your numbers are accurate) that your Profit + Fixed Costs will be 30% of the ARV. So, the two numbers you need to determine are:

1. What percentage of that 30% do you need as profit to make the deal work?

2. What percentage of that 30% will Fixed Costs eat up?

If you have anything left over, that's how much you can pay over and above the 70% rule for the property.

For example, let's say that you are willing to accept 10% gross profit margin and your Fixed Costs will eat up 10% of the ARV -- in this case, you have an extra 10% that you can pay above the 70% rule.

Here's a real world example. Let's say you have a property with an ARV of $200, Rehab Costs of $50K, Fixed Costs of $20K (10%):

- The 70% rule says you can pay:

($200K * 70%) - $50K = $90K Purchase Price

-  That would give you a Profit of $40K on the deal (20%).

But, let's say that you're willing to accept $20K Profit (10%) instead of $40K?  Then you can pay $110K for the same property, which puts it at the 80% rule.  This is because you were willing to give up 10% in profit and could therefore use that 10% to increase the purchase price.

Anyway, this is why I don't like the 70% rule.  It makes too many assumptions (how much you'll spend on Fixed Costs, how much you want in profit, etc).

Instead, do a search on here for "The Flip Formula" and use that instead...