Clarification on 70% rule

[Richard Redding]

We're about to jump into our first flipping venture. We understand the basics of the 70% rule but have one major question we aren't sure about.

We understand that we take ARV and multiply by 70% and this gives us our project budget. We know that from that 70% we subtract out our rehab and repair costs and this gives us our offer price.

The question is what about the holding costs, commissions, closing costs, etc? Does that come out of our profit margin, or do we include all that in our rehab/repair costs estimation, thus lowering our offer price?

Thanks gang!

[Jon Holdman]

If your buy plus rehab cost is 70% of the eventually selling price (ARV), you use hard money to fund the deal, you hold for six months, you actually sell at your expected ARV and you actually stick to your rehab budget, then you can expect a profit of about 15% of ARV. If you're hoping for a 30% of ARV profit, then your purchase plus rehab needs to be about 55% of ARV so you can cover the remaining 15% and still make your 30% profit.

Even finding a 70% deal is tough. Finding a 55% deal is going to be impossible.

Realistically, you should expect things won't go perfectly. Instead, you'll end up going over budget on the rehab, holding longer than you expect (more interest, more taxes, more insurance) and that you'll sell for less than you expect. Those are the things that eat into that 15% profit margin.

Also, if you're borrowing 70% of ARV and kicking in 15% of your own cash and earning 15% of ARV as your return, you're making a 100% return on the money you've invested.