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When you first get started learning how to flip houses, the majority of real estate investors will tell you that you absolutely,positively must have a complete understanding of the numbers. For those who are not math whizzes, this may sound a bit intimidating. When I first started flipping houses I thought this meant knowledge of advanced calculus, derivatives, complex algebra, perhaps even an advanced degree in algebraic geometry… Much to my pleasant surprise, none of this was true. The incredible thing is that in the flipping properties industry, you don’t have to know intense mathematical formulas. In fact, all you really need to know is fifth grade math.
For example, if you can understand complex numbers such as: 200,000 / 70% = 140,000 Then congrats, you have the requisite math skills to successfully flip houses!
One thing is definitely true though, if you go into any form of real estate investing without knowing your numbers cold…you will have a very short house flipping career.
Amazingly, the elementary math mentioned above includes the most basic and most important house flipping mathematical formula of all. Knowledge of this one formula will save you from many costly mistakes for sure. But more importantly it will also make you thousands of dollars throughout your real estate investing career. And all you have to do is understand what’s known as The 70% Rule.
The Most Important Number When Learning How to Flip Houses
Once you have determined the ARV, the next mathematical step in the house flipping process involves the vaunted 70% rule. The 70% Rule has been around for a long time in the real estate industry, as I certainly did not make it up. Someone far smarter than me figured this one out a long time ago.
The ARV by the way, is the “after repair value” of the home. This is what you hope to sell the property for prior to purchasing it.
The accuracy of the 70% rule depends on your level of experience in gauging the after repair value of a house – which as with most things in life, the more experience you have flipping houses and using the rule, the more accurate your estimates will become. It is typical for the seventy percent rule to vary from property to property; it all depends on what your ARV is. The higher you estimate your ARV to be, the more your seventy percent rule may be, up to 80% or even 90% in some cases. Yet the lower your after repair value is, the 70% rule may contract to 60% or even 50% in some cases. It really all depends on the kind of house that you’re about to flip. Often times I focus on flipping first time buyer-type homes, which I usually find in the $200,000 range (at least where I operate my house flipping business). I recommend adjusting the numbers to the market you are involved in. After all, you probably have a better understanding or your particular market compared to me up here in Massachusetts. I use this example number throughout my real estate writing, but it’s a good rule to review to make sure that you understand it fully. So back to our example. Let’s assume that you have determined that the ARV of a house you want to flip is around the $200,000 price range. The next step would be to utilize the 70% rule to figure out how much you should be spending on your rehab, as well as the maximum you should be offering for the property.
So let’s say the numbers look like this:
ARV = $200,000 70% Rule = $140,000 ($200,000 x .70) Repairs = $40,000 Max buy price = $100,000 I have simplified the formula just a tad, but the most important thing to remember when flipping houses is that the math involved is extremely simple. This rule helps to ensure against taking an unnecessary risk and will help to ensure that you do turn a profit or at the least break even. For folks just getting involved in the real estate investment business, the 70% rule is an absolute must to get a grip on. We make sure that our students understand it fully. In the end, the 70% Rule is a very strong rule to stick to and when used consistently, can save you a lot of dough as well as prevent you from getting into any bad deals. I highly recommend that you stick with the rule each and every day throughout the length of your flipping houses career.
Mike LaCava is a full time real estate investor located in Southeastern Massachusetts. To find out more about Mike as well as house flipping and his specialty how to flip houses with no money, check out his website where you can get more great information on real estate investing and house flipping.