The 70% Rule is a Good Guideline

I've been fairly critical of the other rule of thumbs that float around these boards, a little bit regarding the 50% rule and a lot regarding the 2% rule. However, I must say, the 70% rule is a very solid guideline (there are no rules that work every time when it comes to real estate).

The rule simply states:

(ARV X 0.7) - rehab = Strike Price

As Chris Feltus wrote,

"This “rule” (read guideline) is critical, because as we all know, you make money in real estate when you buy. If you come in at the wrong price your profit margins can quickly diminish or be wiped out completely. The ARV and rehab are then used in conjunction to calculate the formula. If either of these numbers are inaccurate, you have the potential to get in over your head, or operate on less than desirable margins."

So of course, the rule is useless if you have the two most important numbers (ARV and rehab costs) wrong. But it does give you a good guideline for the other expenses plus profit margin on most deals other than in really cheap areas (say under $50,000). 

Before purchasing a property, you should back everything out (closing costs, real estate commission, holding costs, expected profit, etc.) to verify. But when it comes to quickly analyzing deals and making offers on the spot when necessary, the 70% rule is solid guideline to work with.