Flipping a house requires a lot of work, and a lot of money. There’s the initial investment in the property itself, plus the time, sweat and cash it takes to make the necessary improvements. It’s all worth it if you can pocket a big chunk of change on the sale — but, of course, it all hinges on being able to sell it for enough to actually turn a profit.
That part can get tricky. House flipping comes with some guesswork: How much will repairs cost? Will there be any unexpected expenses? How much will the house ultimately sell for? To help answer some of these questions, many flippers turn to the 70 percent rule, a guideline that helps estimate how much you can spend on a flip and still make money on the sale. Here’s a closer look.
How house flipping works
You’ve probably seen enough HGTV to have a general idea of what it means to flip a house. Buy a bargain-priced property that needs work, fix whatever needs fixing and then sell it for a profit: Simple, right?
It can be, if you find a house for a great price that needs only basic, straightforward repairs. But that requires a lot to go right. And if you’ve ever taken on a DIY project at home, you can probably guess that renovations require you to expect the unexpected. You could stumble across a major plumbing problem or a foundation issue. You could finish the house right as the market takes a dip, leaving you paying for things like utilities, home insurance and property taxes while you wait to find a buyer.
Ultimately, house flipping is a lot more complicated — and riskier — than it looks on TV. The 70 percent rule can help hopeful flippers gauge whether a property is worth the risk.
What is the 70% rule?
This rule of thumb helps you determine the maximum amount you should spend to buy the house you want to flip. Put simply, the 70 percent rule states that you shouldn’t buy a distressed property for more than 70 percent of the home’s after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.
(ARV x 0.7) – total repair cost = maximum purchase amount
For example, let’s say Sofia is thinking about buying a fixer-upper in an up-and-coming neighborhood. Good-condition homes of a similar size on the same street have sold for around $300,000. She talks to a local Realtor, who confirms that, if the house were in good condition, it would likely sell for around $300,000. So Sofia pins her ARV at $300,000.
After getting a home inspection, Sofia learns the house needs some electrical work. She estimates $2,000 for that, plus $40,000 for the cosmetic fixes she plans to make. Adding a little padding to be safe, she estimates the total cost of repairs at $45,000.
Now, Sofia can use the 70 percent rule to figure out how much she should pay for the house. 70 percent of $300,000 is $210,000. Setting aside $45,000 for repairs, she decides to make an offer of $165,000 on the house.
If everything goes according to plan, Sofia would pocket $90,000. But the 70 percent rule is just a guideline, not a guarantee — she might find hidden issues that add another $10,000 to her repair costs. Or the market might cool off so that she can only sell for $280,000. Now, Sofia will only make $60,000. Still, because she estimated wisely with the 70 percent rule, she’ll make a decent profit on the flip.
Determining after-repair value
For the 70 percent rule to really work, you need to start with an intelligent guess at a property’s after-repair value.
If you’re not a pro flipper who can estimate repairs in your head, you’ll probably want some professional help. To guess at the cost of repairs, a home inspection is your best bet. This means having a pro look at the house and tell you what kinds of problems it has, whether minor (an easily fixable leak, for example) or major (the big expense of needing a whole new roof). The inspector can also clue you in to potential pest problems, the state of the foundation and more.
Armed with your home inspection report, you can roughly calculate the cost of the repairs you’ll need to complete to flip the house. You may want to get estimates from professional plumbers, roofers or electricians, or use a website that estimates repair costs for you (like Repair Pricer).
To estimate how much you’ll ultimately be able to sell the house for, talk with a local real estate agent. They understand the market and can help you estimate how much a nicely renovated house in that neighborhood would go for. Looking at comps — how much other, similar homes in the area have recently sold for — can also help you estimate ARV.
Bottom line
The 70 percent rule can help house flippers avoid overspending on a property and ending up in the red. It’s only a guideline, though, not a guarantee —you should still take the time to talk to a local real estate professional to understand the market before you buy, and build extra money into your budget for unexpected surprises.
FAQs
Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.
What is the 70% rule in house flipping? ›
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
What is the golden rule for flipping houses? ›
Many home flippers abide by the so-called golden rule for house flipping: the 70% rule, which says that you should pay no more than 70% of what you estimate the house's ARV (after-repair value) to be. You generally calculate ARV as the current property value plus the added value of any renovations you do.
What is the Brrrr method 70 rule? ›
This rule states that the most an investor should pay for a property is 70% of the After Repair Value minus the estimated rehab cost. The idea is that the remaining 30% will cover the real estate commission, closing costs and so forth while still leaving a healthy profit.
Is 100k enough to flip a house? ›
If you've got $100,000, then you'll be set up to fix & flip any property successfully. The most important part is ensuring that you've correctly estimated your costs and planned a detailed budget that keeps you in check.
How much profit is a good house flip? ›
A 10% profit would be on the lower end, and a 20% profit would be considered a 'home-run' by most rehabber's standards. So for example, if a property's After Repair Value (Resale Value) is $250,000 a rehabber should expect to make $25,000 on the lower end to $50,000. on the higher end.
What is the key to house flipping? ›
You must have a realistic idea of the amount of work that needs to be done before you purchase a property to ensure you're not biting off more than you can chew. In order to make a profit from flipping a house, you need to be able to sell it for more than the purchase price, plus the cost of any renovations.
What are red flags for house flipping? ›
Red flags that you — and your home inspector — should be on the lookout for include the following: Lack of documentation: Hybart recommends asking for a thorough paper trail of the project. “Ask for receipts and invoices for the repairs completed on the property,” she says.
What is the golden formula for real estate? ›
It recommends that an investor pay no more than 70% of a home's after-repair value (ARV) minus repair costs. To calculate the 70% rule, multiply the home's estimated ARV by 0.7 (70%). Take the result and subtract any estimated repair costs. The final result will be the amount you should pay for the property.
Why is house flipping illegal? ›
Property flipping is a common practice in real estate. It involves buying a property and then reselling it for more money. Usually, when someone flips a property, he or she makes repairs and improvements beforehand. It can become illegal if the person falsely represents the condition and value of the property.
Long-Term Capital Gains. House flips are subject to the self-employment tax because the investment property is held for less than a year. You won't need to pay a short-term capital gains tax, as you're already paying self-employment taxes.
How to house flip with no money? ›
Let's explore how you can flip houses without upfront capital and still earn a profit.
- Find Partners. One of the best ways to fund your flipping is to find someone who can be your “sleeping” (non-active) partner. ...
- Hard Money Lenders. ...
- Private Lenders. ...
- Wholesaling. ...
- Crowdfunding. ...
- Seller financing. ...
- Traditional Banks.
The BRRRR method, if executed correctly, provides a continuous stream of funds indefinitely, in contrast to the one-time profit of a flip. Nevertheless, both strategies offer opportunities for quicker cash and potential leverage. The goal remains the same: to create equity and capitalize on that profit.
What is the 50% rule in real estate? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
What are the downsides of BRRRR? ›
The BRRRR Method
There are, however, legitimate downsides to BRRRR investing. It requires a good understanding of real estate valuations and renovation costs to accurately forecast after-repair values (ARVs)—a mistake here could result in being stuck with a mortgage that's higher than the property's worth.
What is the best state to flip houses in? ›
The Best (and Worst) States to Flip Houses
Louisiana is the best state for flipping houses in the U.S. with a score of 41.1 out of 50. This is largely due to the state's high house flipping ROI of 55.6%. Fixer-upper homes in this state are also priced reasonably at $196,763.
How much does it cost to flip a 1000 sq ft house? ›
The “$20 per sq. ft.” rule is a guideline we use to give us a pretty good idea of what it is going to cost us to fix up a house. In a nutshell, this rule comes from our experience that most houses requiring a full “standard” cosmetic rehab will cost around $20 per square foot.
Is it cheaper to flip a house or build? ›
One of the biggest challenges is the upfront costs. Building a new home can be more expensive than rehabbing an existing home, especially if you're looking for a custom design.
What are the cons of flipping houses? ›
Con: Costs
Flipping houses can create cost issues that you don't face with long-term investments. The expenses involved in flipping can demand a lot of money, leading to cash flow problems. Because transaction costs are very high on both the buy and sell sides, they can significantly affect profits.
What is a good ROI on a house flip? ›
An average ROI, on a real estate fix and flip project has traditionally been between 50 and 100 percent. Of course, flipping a house won't always offer such a high return. Expected ROI from house flipping can fluctuate based on the current economy too.
If you're wondering how long it takes to complete such a project, here are some key points to consider: On average, it takes about 3 to 6 months to flip a fixer-upper property. This timeframe allows for the necessary renovations and repairs to be completed.
What is the first thing to do when flipping a house? ›
How To Start Flipping Houses
- Research The Market. The first step toward serious house flipping is knowing the housing market. ...
- Understand Neighborhood Rankings. ...
- Secure Your Finances. ...
- Get Expert Counsel. ...
- Find And Buy A House. ...
- Sell For A Profit.
Far too many would-be real estate moguls overlook the basics and end up failing—and this includes flippers. These are individuals who purchase and renovate properties before putting them back on the market to make a profit.
How much money do I need to start flipping houses? ›
The average ballpark figure for flipping houses in California is between $20,000 and $70,000. This includes the subsequent costs to renovate, market, and hold the property. The main cost of house flipping is acquiring the property. The renovation costs can go up to $49,987.
How do you calculate a 70% rule? ›
What is the 70% Rule?
- A properties ARV is $200,000 and it needs an estimated $30,000 in repairs.
- The 70% rule states on this occasion, that an investor should pay $110,000.
- ($200,000 x 70%) – $30,000 = $110,000.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
