when do you use the 70% Rule

[Wayne Hayward]

My name is Wayne, I am new to RE investing. I am hearing a lot about the 70% rule. How often is this rule used and what success have you achieved using it? Please advise.

[Drew C Grossman]

@Wayne Hayward

The "70% rule" mostly applies to flippers and builders but really can apply to any real estate investor including long term / build to rent. It just means the total project cost goal needs to be under 70% of ARV (After Repair Value) or Market Value. For example.. working backwards.. you come across a cookie cutter 3/2 single family house in a neighborhood that needs some work. Fixed up its worth 300k....it needs about 50k of work to get it to that value...with the 70% rule you know you cannot pay more than $160k for the property itself. ($160k+$50k / $300k = 70%) The reason behind this (especially for flippers and builders) is you need at least 30% margin because that money is considered earned income when you sell short term and by the time you pay taxes you really are not making as much as you thought. You need to make sure you have a healthy margin for volatility in the market and also potential for increased holding costs if you are using short term leverage. Anything under 30% margin is considered skinny deal. I am using the 70% rule now for a build to rent / long term rental project.