We are real estate investors — we are such rebels, right?
We all want to break the rules. I think we are all sometimes guilty of it. I know I am.
But every time I break the rule, it really hurt me. Breaking the rules may seem like a great idea at first, but breaking the rules of turning a house or investing in real estate really only hurt you.
There are many examples of violating the rules, such as not following the 70% rule, using the “Eraser Calculator” with ARV and MAO, or dealing with partners and team members in an unmoral way.
The hardest to get over is the last one above. Whatever you do, we recommend that you do not break these rules.But other rules, especially 70% ruleCan be damaged in very special circumstances.
Break the house flipping rule
I recently asked a lot of questions from readers of this blog and my own blog about how to flip a house when the 70% rule may not apply to their market. It may not apply exactly, but it still does.
Massachusetts is generally a fairly expensive place to live, but the submarket I run is the rest of Massachusetts real estate market.
Wareham, Massachusetts is well aware of the fact that it doesn’t really belong to the same league as Orange County, California in terms of price. However, I have turned many homes out of my market and have been very successful in doing that using the same principles that I use in the primary market. These are a bit expensive markets and the 70% rule doesn’t apply exactly, but it still does.
As you may know, the 70% rule is a benchmark used to determine how to do house-turning math.
How to flip a house using 70% rule reviews
As you may remember, the 70% rule is to avoid problems when turning the house over.Also, you will not be able to execute the “erase operation” during evaluation. How to turn a house over.. There are many ways to evaluate a property, but the 70% rule doesn’t apply exactly to all situations, but it’s a good benchmark I use to be honest and secure, so I’m It is a rule that I have always followed. Good profit of property.
So, for example, we determined that the value of a home after repair was $ 200,000.
There have been several comps in the area over the last 6 months, indicating that $ 200,000 is a fair price. These recent sales provide a good benchmark for getting started with math.
1. Receive $ 200,000 and multiply by 70%. That’s $ 140,000.
ARV = $ 200,000
70% rule: $ 200,000 x .70 = $ 140,000
2. Deduct repair costs from that $ 140,000. According to the contractor, the rehab cost will be $ 40,000.
Now use the 70% rule to subtract $ 40,000 from $ 140,000.
Repair cost = $ 40,000
70% rule = $ 140,000
The highest price you want to pay for this house is $ 100,000:
Maximum purchase price = $ 100,000
But that’s not all …
This formula is very effective in protecting you from trouble, especially when you first start investing in real estate or turning your house over. But like any other “rule”, there are always exceptions …
Before breaking the rules … do this first
As I said earlier, Wareham, Massachusetts is not Orange County or Naples, Florida. There are many other markets where investing in real estate is much more expensive.
That said, there are always submarket pockets that are more affordable, less risky for new real estate investors, and ideal for potential home flips.
Therefore, if you’re new to real estate investment and home flipping, it’s generally a good idea to look for cheaper submarkets or more expensive town neighborhoods or streets and start from there.
Doing a houseflip with an ARV of $ 200,000 is much less risky for a new real estate investor instead of doing a houseflip for $ 400,000 or perhaps $ 500,000. Even its $ 400- $ 500,000 market has more affordable submarkets, neighborhoods, and even individual streets.
seriously. Find them. Look for them. Ask your real estate broker about them. They are there.
You may have to travel 15 or 20 miles away from where you live, but start in these submarkets rather than starting a business that flips your home in a more expensive market That is much less dangerous.
However, if for some reason you can’t find these more affordable markets, here are some helpful steps on how to invest in these more expensive markets. a bit Break the 70% rule.
If you violate the 70% rule – pay close attention
For example, suppose you live in Boulder, Colorado and your market is in the $ 400,000 range. In many other situations, it may be possible to raise the 70% rule to 80%. I decided to travel outside Boulder and look for a cheaper home with an average selling price of 26 miles away, like Bar Sword, Colorado. $ 266,600!!
But for the sake of discussion, let’s use CO’s Boulder as an example.
The bottom line is this: the 70% rule is flexible and does no harm — but it depends on your market. If you absolutely need to invest in Boulder, Colorado That way you can potentially go to 80%.
As a general rule, the higher the price of a property, the more flexible the benefits of the 70% rule. In these cases, for ARVs above $ 200,000, the price range can be considered the “higher price” in the market. It all depends on your local market.
However, if you violate the 70% rule, you should definitely check the costs of rehab, financing, freight, and other soft costs. Dead.. You cannot use “Elimination Calculations” in these cost forecasts. In addition, you need to be prepared for potential downside risks.
For example, if the ARV fluctuates sharply to $ 350,000 instead of the expected $ 400,000. You gave up $ 50,000 in potential profit. Wow!
Let’s say the cost estimate for this flip was $ 60,000 due to a refurbishment. But suddenly it was $ 80,000. This is due to a problem with the foundation or some major work required on the HVAC system …Are you prepared for these cost overruns?
If you’re flipping using the 70% rule, you have enough cushion to absorb these cost overruns and sudden drops in ARV.
With the 80% rule, you are much less likely to make a profit. Therefore, we need to be prepared for this potential downside risk.
That’s why it’s so important to get as close as possible to the 70% rule when first learning how to turn a house over. This one simple rule kept me away from worse deals that I could remember.
My experience of flipping a house with 70% rules
By using the 70% rule, Margin of about 30% on my flip.. In some cases it will be higher. I’m very comfortable because the 30% margin allows for cost overruns and provides some flexibility at valued costs.
If you aim for 30%, the average takeaway profit will be about 10-20% when you calculate the financial costs and other soft costs.
If you feel that the 70% rate rule is confusing downwards, perform a detailed cost analysis of all costs to see where they come from.
Not every flip you make will bring you a $ 65,000 profit. Reality TV shows that flip through the media and home make you believe this is the case. And in some major news publications, it’s widely reported that house flippers make a lot of money on every flip. It doesn’t happen on every flip for you.
Turning over a more expensive property can definitely make more money. However, its potential benefits increase the risk. So if you violate the 70% rule and go to the 80% rule instead, Did you prepare?
70% or bust?
As you may know, different home flipping markets have different taxes, lending environments and prices. In some cases, you may have questions about this question in remote markets such as Malaysia, New Zealand and Australia.
As you can imagine, the market is a bit different from the market house in Wareham, Massachusetts.
Therefore, follow the 70% rule as much as possible. Adjust the 70% rule based on market conditions, but don’t be too aggressive. The most important thing to remember is that 70% of the rules are there to guide you, protect you from trouble, and ensure great and decent profits in the process.
If you can do this, please leave a comment below! Have you ever broken the 70% rule? How did it look for you? Did you make money or lose the break-even point? Please let me know by leaving a comment below!