You may have heard someone mention the 70% rule in regards to investing in a home purchase and wondered what they are talking about. 770 Capital Investment Group is here to explain, and help with all of your real estate investment needs.
Many real estate investors use the 70% rule when deciding how much to pay for a potential property. For those unfamiliar, it states that an investor should spend no more than 70% of a property’s after repair value (ARV) when buying a real estate investment. This number is the sum of the sale price along with any necessary repairs or upgrades that will be made prior to the resale. This strategy is particularly useful for house flippers, those buying a property, making necessary repairs, then selling the property quickly for a profit. It therefore is critical to accurately assess the potential value of the property and estimate repair costs.
The simplest way to apply the rule is to multiply your property’s ARV by 0.7 to get your estimated cost. For example if your property has an ARV of $250,000 and requires $50,000 of repairs, you should aim to purchase the property for $125,000 or less (70% of $250,000 is $175,000 – subtract the $50,000 in repair costs to get your target purchase price of 125,000). While there is no strategy that guarantees a profit, the 70% rule will give you flexibility in handling most unexpected expenses that may occur.
You will want to establish good working relationships with general contractors, home repair services such as plumbers and HVAC companies, and an all-around handyman. These professional trades can help you quickly and accurately estimate your repair and upgrade costs as well as properly perform the work to local standards once you make your purchase. Don’t get caught off guard with a costly repair that eats into your profit margins.
Real estate investments should always be considered when planning an investment strategy. The real estate market historically performs better than almost every other type of investment. With the right research and preparation you too can join the real estate investing market. Make sure to contact 770 Capital Investment Group for all your investment needs.