65% minus repairs rule question

[Greg S.]

Hello all, quick question...

It seems that the standard for purchasing investment houses for rehab is to use the rule 65% of ARV, minus repair costs.

Using this formula, about what percent profit is built into the deal? I understand that it will be different for each deal, so I am just looking for an average estimate to give myself an idea of how much money there is to be made.

Thanks!
Greg

[J Scott]

I would never purchase an investment using a "rule of thumb." While rules of thumb are fine for screening or doing basic evaluation, if you make purchase decisions based on these sorts of generalizations, you're bound to get burned at some point.

I've written a good bit about determining max purchase price with The Flip Formula, which is basically a formula that takes into account all cost aspects of a typical flip deal (as opposed to use estimates like 65% or 70%):

http://www.biggerpockets.com/renewsblog/2010/03/10/determining-maximum-purchase-price-mpp/