As a real estate investor, you’ll hear about different rules and formulas designed to mitigate risk. One such rule is the 70% rule. What is the 70% rule in real estate? The 70% rule simply states that you shouldn’t pay more than 70% of a property’s after-repair-value (ARV) minus estimated repair costs (ERC).
This can probably be better explained by creating an example. Let’s imagine you have your eye on a house that is listed for $70,000. You estimate the property needs $30,000 in repairs (ERC), and the after-repair-value (ARV) is $120,000.
Based on the 70% rule, the maximum you could pay would be $54,000. Here’s the math: $120,000 (ARV) x .7 = $84,000. $84,000 – (ERC) $30,000 = $54,000.
Is the 70% a good rule to follow?
Any rule in real estate needs to be considered in light of your goals, the market and the individual deal. If you follow the 70% rule, will you profit enough to meet your real estate goals?
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Furthermore, is the 70% rule realistic given the real estate market you’re buying properties in?
In a seller’s market, where you may have properties selling in record times with multiple offers, the 70% rule may make it impossible to land deals.
On the flip side, in a market where properties are sitting for long periods of time, the maximum you should consider paying may be far less than what the 70% rule would allow.
You shouldn’t use the 70% rule, or any other formula, as a blanket rule to live by. The best way to approach real estate is to consider the each deal individually in light of the market and your real estate goals.