WHAT IS THE 70% RULE IN REAL ESTATE & SHOULD IT BE FOLLOWED?

WHAT IS THE 70% RULE IN REAL ESTATE

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.

Conclusion

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.  

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