Heard about the 70% rule for real estate investing and not sure what it is?
You’ve come to the right place.
In this article, we’ll explain what the 70% rule is, how to use it, and the many contextual nuances involved in applying it.
We’ll also show you some great real-world examples of investors using the 70% rule (or some variation of it).
Let’s dive in.
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What is the 70% Rule in Real Estate Investing
The 70% rule is a guideline that real estate investors use to determine their max offer on an investment property. The intent of the 70% rule is to ensure that the investor never overpays for distressed properties (so they can always make a profit).
So… how does it work?
The basic premise of the 70% rule is that an investor should never pay more than 70% of the after-repair value (ARV) of a property, minus the cost of repairs.
Imagine that you want to flip homes. And you find a property that, after running comps, you expect will sell for $250,000 on the market once it’s repaired. That’s it’s ARV.
But you also expect that repair costs on the property will set you back about $30,000.
The 70% rule calculations, then, would look something like this…
(($250,000 x .70) – $30,000) = $145,000
So according to the 70% rule here, your max offer on this property would be $145,000 — allegedly, that would give you enough wiggle room to repair the property and still make a hefty profit when you sell.
But, to be honest, as this formula is… it’d be laughable to most investors. No real-world investor would use a formula this simple.
Well, here’s an abbreviated list of other costs that investors need to consider when determining their max offer…
- Repair Cost Reserve (additional 10%)
- Closing Costs
- Carrying Costs
- Inspection Costs
- Financing Costs
- Hard Money Loan Repayment
- Loan Origination Fee
- Mortgage Points
- Property Taxes
- Insurance Costs
- HOA / Condo Fees
- Utility Costs
- Realtor Fees
- Transfer & Conveyance Fees
You get the idea.
Every deal is different. And there’s a lot that goes into it.
The 70% rule is simply a guideline to point you in the right direction and help you not lose money on deals — sometimes, you’ll want to offer more… other times, you’ll want to offer less.
Often times, you’ll want to factor in the other costs (beyond just repair costs) associated with purchasing a property to make your max offer calculations much more accurate.
Why is the 70% Rule Important?
The 70% rule is important because it serves as a reminder to investors not to overpay for properties.
If you’re paying too much for an investment property — a common mistake — then it will be very difficult (if not impossible) to make a profit.
How Accurate is The 70% Rule?
The accuracy of the 70% rule depends entirely on how you apply it.
We might hand you a sniper rifle that’s used by the Navy SEALS, but if you aren’t experienced at shooting, you’re still not going to hit your target…
Rules and tools count, but expertise counts twice.
- How accurate are your comps on the property?
- How accurate is your ARV?
- How accurate is your calculation of other costs?
- How well do you understand the property, the current market, and buyer expectations?
If you’re uber-accurate on all of those things, then your application of the 70% rule will likely be uber-accurate as well.
In other words, you get out of it what you put in.
Now, let’s look at how the 70% rule works for different real estate investing business models…
How Does The 70% Rule Work For Wholesalers?
The 70% rule can definitely be used for wholesaling, it just requires us to take one step back.
Wholesalers flip purchase agreements to other real estate investors — and those real estate investors want to (at least) come somewhere within the ballpark of the 70% rule for their investments.
This means that wholesalers don’t just need to calculate the 70% rule for themselves, they need to calculate it for their cash buyers. And then they need to factor in their desired assignment fee.
Here’s a simplified example.
Continuing with our earlier numbers, let’s assume you’re wholesaling the property rather than flipping it yourself. It’s worth $250,000 and repair costs are $30,000. Knowing what we now know about the nuances of holding costs and closing costs, let’s stack on another $15,000 in likely expenses for our cash buyers.
So now we’re at $45,000 in costs for our buyer and an ARV of $250,000. How much do we want to make as the wholesaler? How about $10,000?
Here’s the formula, then, for what we, as the wholesaler, should offer to the motivated seller…
(($250,000 x .70) – $45,000 – $10,000) = $120,000
Allegedly, if the seller accepts our offer of $120,000, then we should be able to flip the contract to an investor, make $10,000 in the middle, and have our buyer still get a healthy profit.
How Does The 70% Rule Work For Buy-and-Hold Investors?
Buy-and-hold investors will generally calculate their max offer on a property with a bit more leniency than wholesalers or house flippers.
This is because they are looking for long-term investments (not quick-hitting payoffs) and they also often do minimal renovations in order to get tenants in the property.
Most buy-and-hold investors will include annual yield and income, not just ARV, in their calculations.
The Limits of The 70% Rule
There are definitely limits to the usefulness of the 70% rule.
First, as we already mentioned, it’s more of a guideline than a rule. You should virtually never follow it to a T… if you do, you’re not going to be a real estate investor for very long.
Second, it’s only as accurate as you make it (see above). Good real estate investing means good math — accurate math.
The more accurate your comps, your understanding of the market, and your experience as a real estate investor, the better you’ll be able to leverage the 70% rule.
Finally, there will always be exceptions to the rule because there is no one-size-fits-all solution in real estate investing.
For example, what if you find a property that needs very little work and is in an amazing location? You might be able to pay way more than 70% of ARV and still make a killing.
Or, on the other hand, what if you find a property that needs a ton of work and is in a location that’s not so great? You might need to drop well below 70% of ARV to make the deal worth your while.
The key is to always be learning, always be growing, and always be adapting as a real estate investor. The more you learn, the more deals you’ll do, and the more money you’ll make.
Other Things to Consider
We’ve talked about how there are a lot of things to consider for every real estate deal — and how you use the 70% rule will differ from deal to deal.
So… what are some of those things that you should consider?
Here’s a list of some of the more important things…
State of The Market — What’s the market like? How fast do you expect you’ll be able to offload the property considering its location? This is critical information to consider because it changes your holding costs.
Buyer Expectations — Who is your target buyer? What do they expect to pay for a property like this one considering its location and condition? You need to know this because it will directly impact your max offer.
Desired Profit — How much profit do you want to make on this deal? If you’re wholesaling, you’ll need to factor in your assignment fee.
Crime Rate — If you’re buying a property in a high-crime neighborhood, that means your property is at risk and you might need to make future repairs due to crime or vandalism.
Risk — There’s always risk in real estate investing. But some deals are riskier than others. For example, a fixer-upper in a good location is less risky than a fixer-upper in a bad location. The key is to always be aware of the risks involved for each deal and to factor those risks into your calculations.
Liens — Always, always, ALWAYS do a title search to check for any outstanding liens on the property. This should have an impact on what you offer for the property.
Seller Assistance — Does the seller need help moving or cleaning out their home? If you’re going to provide additional services, then make sure to decrease your max offer.
Taxes — Don’t just factor in property taxes for your holding costs. Also, consider any back taxes that the seller hasn’t paid and that will pass to you if you purchase the property.
Insurance — Insurance is critical for all real estate investors, but the costs can vary widely depending on the property you’re buying. The age of the property, the location, and even the type of property (residential vs commercial) will all impact your insurance rates.
Plan For Property — What do you plan to do with the investment property? Hold it? Flip it? Wholesale it? This is one of the biggest things that will determine how much you can pay for the property.
The Biggest Risks of The 70% Rule
Obviously, the 70% rule isn’t perfect.
What are the specific risks involved in using it?
The biggest risks are…
Overpaying For A Property — If you don’t use the 70% rule responsibly, you could overpay for a property. This is the worst thing to do with a real estate investment. When in doubt, lower your max offer.
Counting on Appreciation — Some investors fudge the 70% rule (or go even higher with their offer) because they’re desperate for a deal and they tell themselves that the appreciation will make up for it. But don’t count on it. It might appreciate the way you want… but it might not.
Not Accounting For All Costs — The 70% rule is a guideline, not a hard and fast rule. You need to account for your own costs (like Closing Costs) when you’re calculating your max offer.
Not Negotiating — Just because you use the 70% rule doesn’t mean that’s what you have to pay. You can (and should) always try to negotiate the price down. Start below your max offer so you leave room for negotiating.
Real-World Examples of Investors Using The 70% Rule
We can talk about the ins and out of the 70% rule until we’re blue in the face…
But why not just see it in action?
Below are three examples of actual real estate investors talking about how they use (or don’t use) the 70% rule in their businesses. If you really want to understand the 70% rule and all its intricacies, then we highly recommend watching all three of these videos.
Ryan Dossey & The 75% Rule as a Guideline
Ryan Dossey uses a variation of the 70% rule in his “keep the best, wholesale the rest” investing business — the 75% rule. In the video below, he’ll explain how he uses it, and when he doesn’t use it. His primary investing business model is BRRRR.
April Crossley & Her Case Against The 70% Rule
April Crossley “hates” the 70% rule. Why? Check out the video to learn why she doesn’t use it when buying properties for her real estate investing business.
Nasar El-arabi & The 70% Rule For Wholesaling
Nasar El-arabi likes to use the 70% rule for his wholesaling deals. But there are a few additional nuances to consider. Check out the video below to learn what those are.
Should You Use The 70% Rule?
But don’t use it blindly.
Every real estate deal has a lot of nuances.
Before you calculate your max cash offer using some version of the 70% rule, you’ll want to know your holding costs, what you plan to do with the property, the risks involved, your expected profit, the state of the market, and other important information.
The 70% rule is only good… if you use it good.
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