Understanding the 70 Rule in Real Estate Investment
by Christopher Levarek
“A Good rule of thumb is to assume that everything matters”
- Richard Thaler
Let’s be honest, people who want to make more money often choose to invest in real estate. But the market can be hard to understand, and it can be hard to make good choices.
In real estate, this is where the "70 rule" comes in. The 70 rule, also called the 70% rule, is a guideline that helps buyers figure out if a real estate deal will make money.
In this piece, we will go over what the 70 rule is, how it works, and why it is a useful tool for real estate investors.
So What is the 70 Rule?
1. Understanding the 70 Rule
The 70 rule is a general principle that suggests an investor should pay no more than 70% of the after-repair value (ARV) of a property, minus the repair costs. It is primarily used in fix-and-flip scenarios, where investors purchase properties, renovate them, and then sell them for a profit. The rule acts as a quick screening tool to determine whether a potential investment is financially viable.
2. How Does the 70 Rule Work?
To apply the 70 rule, an investor first estimates the ARV of a property. This is the expected value of the property after it has been fully repaired and renovated. Next, the investor subtracts the estimated repair costs from the ARV. The resulting figure is the maximum purchase price the investor should consider.
3. Applying the 70 Rule in Real Estate
Let's say you have identified a property with an estimated ARV of $300,000. After conducting a thorough assessment, you determine that the repair costs will amount to $30,000. To apply the 70 rule, multiply the ARV by 0.7 and subtract the repair costs. In this case, the maximum purchase price would be $180,000 ($300,000 x 0.7 - $30,000).
4. Benefits of Using the 70 Rule
The 70 rule offers several benefits for real estate investors. First, it provides a quick and straightforward way to evaluate potential deals. By adhering to this rule, investors can avoid overpaying for properties and mitigate financial risks. Secondly, the 70 rule helps investors identify profitable opportunities and determine if a property has enough potential to yield a reasonable return on investment.
5. Limitations of the 70 Rule
While the 70 rule is a valuable tool, it is important to recognize its limitations. It is a simplified guideline that does not account for all factors influencing a real estate investment. For instance, it does not consider financing costs, holding expenses, or market fluctuations. Additionally, the rule assumes accurate estimates for repair costs and ARV, which can be challenging to determine precisely.
6. Common Mistakes to Avoid
To make the most of the 70 rule, investors should be aware of common mistakes. One common error is underestimating repair costs, leading to unexpected expenses and reduced profitability. Another mistake is overestimating the ARV, which can result in overpaying for a property. Additionally, failing to account for other expenses like closing costs, agent fees, and taxes can significantly impact the overall profitability of an investment.
Other Factors to Consider beyond the 70 Rule
Beyond the 70 rule, investors must consider other factors when evaluating real estate opportunities. Location plays a crucial role in determining property values and demand. Economic trends, such as job growth and population growth, can also impact the market. Furthermore, investors should assess the condition of the property, neighborhood dynamics, and potential rental income if considering buy-and-hold strategies.
8. Strategies to Maximize Profitability
To maximize profitability in real estate investment, investors can employ various strategies. These include negotiating favorable purchase prices, minimizing repair costs through efficient planning, and marketing the property effectively to attract potential buyers or tenants. Additionally, maintaining a network of trusted professionals, such as contractors and real estate agents, can streamline the investment process.
9. The Importance of Due Diligence
Thorough due diligence is crucial when implementing the 70 rule or any real estate investment strategy. Conducting property inspections, reviewing market data, and verifying repair cost estimates are essential steps in minimizing risks. Additionally, investors should carefully analyze financial projections, potential cash flows, and the overall return on investment before making a purchase decision.
10. Long-Term vs. Short-Term Investments
Real estate investment offers both short-term and long-term opportunities. Short-term investments, such as fix-and-flip projects, allow investors to generate quick profits. Long-term investments, such as rental properties, provide a steady income stream and potential appreciation over time. It is important for investors to determine their goals and risk tolerance when deciding which strategy to pursue.
11. Financing Options for Real Estate Investment
Financing plays a significant role in real estate investment. Investors have several options, including traditional mortgages, hard money loans, private lenders, and partnerships. Each option has its own advantages and considerations, such as interest rates, terms, and qualification requirements. Evaluating different financing options can help investors optimize their capital and maximize returns.
12. Assessing Risk and Return
Real estate investment inherently involves risks. Investors must carefully assess these risks and evaluate their potential returns. Factors such as market volatility, economic conditions, and property-specific risks should be considered. Diversifying investments across different property types, locations, and investment strategies can help mitigate risks and increase overall portfolio stability.
13. Developing a Diversified Portfolio
Building a diversified real estate portfolio is essential for long-term success. By investing in various property types, such as residential, commercial, or industrial, investors can spread risk and capture opportunities in different market segments. Additionally, diversification across geographic locations can protect against localized economic downturns.
14. Tracking Market Trends
Staying informed about market trends is crucial for real estate investors. Monitoring factors such as interest rates, housing demand, and local development plans can provide valuable insights into future opportunities and potential risks. Engaging with local real estate associations, attending industry events, and leveraging online resources can help investors stay ahead of market dynamics.
IN FINAL
In real estate, the 70 rule is a useful tool for buyers looking for ways to make money. By following this rule, buyers can quickly figure out if a deal is worth pursuing and avoid making costly mistakes.
But it's important to know what the rule doesn't cover and do your due diligence. Investing in real estate takes careful research, knowledge of the market, and a long-term view. Use other similar rules of thumb and local team knowledge to get a clear understanding of what you are investing into.
Happy Investing!