The 70% of ARV rule.

[Account Closed]

I have heard this for sooooo long. It is such a popular equation, it has almost become a rule. People get mad if there is a property offered at less than 70% of ARV minus repairs. The fact of the matter is, that while popular in REIA groups, this simply is not the case on most investment deals. The large majority of investment properties are bought by people who never have and never will come to a REIA group. They are not on Biggerpockets right now reading this. The thing that attracted me most to Real Estate and "Real Estate Investing" when I first got involved was that I could make up the rules. I could structure deals as creatively as my mind would allow. I could sell a property for as high as the market would allow.

If you are not willing to purchase a deal that does not fall in the 70% of ARV rule that is fine. I completely understand. Let me ask you this question though. Would you purchase a property that needs $0 in rehab for 80% of ARV? How about 85% of ARV? How about a house that needs a minimal amount of work for 78% of ARV? What if there was a house that was new construction in a HOT area that you genuinely believed in; would you purchase it for 90% of appraised value?

The point is not everything fits into one category. There are different investors with different priorities. I have a Doctor friend who lives in another state who makes a TON of money and he asked me for some advice. I went on and on about all the things he could do and after a while he said “Scott, I work all day everyday and on the weekends when I have a small break I spend it with my family. I’m not going out to look at any F$%#ing houses on those days or chase around some partner who is supposed to be doing the work.” We talked more about it and concluded that a sound investment strategy for him would be to buy new to almost new houses and rent them out long term using a property management company. He had a Realtor handle a large amount of the front load of the work and a property management company handle a large amount of the back load. Is this a sound investment strategy? YES! You better believe it is for the number one reason that it fits into his lifestyle and he was comfortable doing it. Would someone who is a “Real Estate Investor” implore this strategy? Probably not.

[Jon K.]

Very well said, I agree with every bit of it. There's no one-size-fits-all strategy because everyone is different. Everyone has their own unique knowledge, skills, resources in both time and money, risk tolerance, comfort level with various strategies and most importantly their own unique goals. It's easy to get sucked in to a mindset that isn't necessarily your own and to borrow goals and plans from other people.

I spun my wheels for most of 2019 chasing deals that I wasn't capable of getting. I passed on no less than three MLS BRRRR deals because I would have ended up leaving roughly 10k of capital in each when it was all said and done. It didn't meet the very rule you're talking about. A real investor wouldn't do this right? PASS, PASS, PASS. And I passed on three properties/deals that I'd be thrilled to have today now that I realize that it is in fact okay to leave capital in a deal.

When I finally put goals and plans on paper, I knew they would have worked and I'd be that much further along now. I hope a lot of people see your post because it's valuable.

[Charles M.]

I look at the % to ARV rule as an amount of time. That is a buy that is 80% ARV and takes 3 weeks in painting, flooring and minimal cosmetic updates then great I'm into it, but for those long full gut jobs then I'd definitely want to be closer to 70% if not even 60%.

[Kenneth Garrett]

@Account Closed

I agree. There are numerous ways to make money as an investor. If you put 20% down on a property it could cash flow just fine, but that would not be my strategy, but it worked for your doctor friend. On rentals I like the BRRRR strategy. Taking a distressed property and rehabbing it which forces the equity. It works great for me. It's definitely not for everyone. On flips I never use percentages. I like actual numbers. Buy for $100K, 25K rehab, sell for $160K profit $25K after expenses. That's a solid flip for me. If I used the 70% rule. I never would have bought it. $160K - $48K (70% of ARV) - $25K would have been an offer of $87K, that's unlikely, but not impossible. By using real numbers I put $25K in my pocket.

Find your investment strategy that works for you.  On rentals make sure you cash flow.  For me $300 is my goal after all expenses (including maintenance, vacancy and capex.  Flips I’m ok with $25K profit.  Others might say I won’t touch it for $40K-50K profit.  It’s your investment.  You get to make your own rules. 

[Aaron Ross]

@Kenneth Garrett

Freeing to read!

[Aaron Ross]

@Charles Martin

No longer hung up. Great post.

[Account Closed]

@Kenneth Garrett
Exactly! Your investment Your rules.

[Account Closed]

@Charles M.

I agree the more work, risk and time the higher I want my return.

[Account Closed]

@Jon K.
Writing stuff down is magical. When you put it on paper it suddenly becomes real and you have to go out there and make it happen. I am a strong believer in writing down your goals.

[Joe M.]

Hey Scott - I know this was posted six months ago, during the peak of the pandemic. But both pre pandemic, during, and at whatever stage we are at right now it has been an extremely....competitive market (in most of the country). Everyone is definitely in different stages of their investing journey. I think depending on which stage people are in they'll have more (or less) options to think creatively about how to grow their real estate portfolio. I know the 70% rule has been a challenge for me in this competitive market. You're definitely right. There are other, creative ways to finance deals. I'd love to see more opinions on this posts. I'd especially be interested in hearing from investors in the early stages of their investing journey. I think for those folks interested in "refinancing" after a rehab, or refinancing in general most hard money lenders, and most traditional lenders that will refinance are currently (and have been) providing 70% or in some cases 75% ARV cashout. Most of the folks on BP are probably believers in BRRRR to get the appropriate velocity out of their money. I think if that is your strategy...your going to have to at least be cognizant of the 70% ARV rule. Unless (and tell me if you do) know a lender that offers 80% or better on the refinance. Thanks for what you do Scott. Enjoy your posts and thought leadership.

[Account Closed]

@Joe M. Great points and response. I do not know any lenders doing 80% right now but someone out there might. Definitely have to stay in that number range to work the BRRR successfully