So, you have found a property you wish to invest in and make the necessary renovations to before selling it for a profit. How do you decide how much you should pay for a distressed property? Here is where the 70% rule comes in with regards to house flipping. It provides you with a general rule of thumb to guide your purchase decisions by, however, you should always keep in mind market conditions and do your due diligence before making any offer.
What Is the 70% Rule?
In order to turn a profit from any distressed property you purchase and renovate to a habitable standard, you will need to estimate its after-repair value. From there, take this figure and multiply it by 70% and deduct the estimated renovation costs from it. This gives you a good idea of the highest offer you should make to purchase the property. Of course, this is not an absolute, and you may end up making a lower or higher offer based on market conditions at the time.
Giving Yourself a Financial Cushion
As with any other investment you make, you will be well aware that market conditions can change between the time you bought the property and the time it’s ready for sale. You may also run into unexpected circumstances, such as a contractor holdup or there being more problems with the property than you have expected. All these can quickly start to eat into your costs and consequently, your profit. That’s why you will want to give yourself a financial cushion by making conservative estimates.
Making Conservative Estimates
What, then, is a conservative estimate? This simply means budgeting more than what you expect to pay. Let’s say you estimate that all renovation works will cost $75,000 in total, but this may not translate into reality. What if the price of materials goes up, or there’s a problem with the contractor? To pre-empt these possibilities, you will want to budget up to $100,000 for renovations.
The same goes for the after-repair value of the property. In this hypothetical scenario, after doing research on similar properties in the market, you reach a conclusion that your property will be worth $300,000 after improvements. However, you never know what can happen in the time before it’s ready for sale. Demand may cool down, resulting in lower house prices everywhere. As such, you should account for a slightly lower after-repair value when doing your calculations.
Turn to InstaLend for a Wide Range of Real Estate Loans
When you are investing in a property, you will no doubt be looking to take out a loan. Whether you are looking for a fix and flip loan or a new construction loan, InstaLend is the right place to start your search. We can get you a loan commitment within a day and close the loan within just a few short days. Please feel free to contact us to apply for a loan today!