There are fundamental principles in house flipping that helps determine how much money to invest in a specific property. Simply put, the 70% rule states that an investor should only post up to 70% of the ARV, otherwise known as the after-repair value, when buying and renovating a property.

Bradley Ransome will explain below why this rule is so important for house flippers, and how to apply this rule in future investment projects.

Why 70%

The 70% rule has its origins in the book “The Millionaire Real Estate Investor” by Gary Keller. In this book, Keller explains that real estate investing is a business like any other – and as such, it should be approached with a clear plan and strategy to maximize profits.

The 70% approach is one of the strategies Keller recommends for flipping success, as it can help determine how much money to spend on a property.

Basically, the rule states that you should only invest up to 70% of the ARV (after repair value) when buying, renovating, then selling a property. For example, if your ARV for an investment property is $200,000, then you shouldn’t invest more than $140,000 in that property to make a sufficient profit.

The Importance of Sticking to 70% ARV:

There are several reasons why the 70% rule is so important in house flipping. These include:

• Avoid Overpaying for a Property

By limiting your investment to 70% of the ARV, an investor can avoid paying too much for the property. If the goal is to make a profit on the project, the objective is to not pay more than necessary. Being able to utilize the extra funds to invest in another property or manage renovations on the initial property will increase overall supplemental profits.

• Protect Cash Flow

Investing too much money in a property won’t allow enough left-over cash to pay for the other expenses involved in flipping, such as renovations, repairs, and marketing. This will limit the ability to make a profit in the long run and could even lead to a loss on the project.

• Control Your Risk

Investing too much money in a property will also increase risk. If something goes wrong during the renovation process, an investor could end up with a property that isn’t worth as much as the initial investment. The project then will not generate enough profit to cover the overall investment. With the 70% rule, investors can protect themselves by limiting expenditures to a more manageable amount.

How to Respect the 70% Rule

Respecting the 70% rule involves a few main steps. In general, investors should avoid:

• Spending more than 70% of the total budget on any one property
• Ignoring other major expenses, such as repairs and renovations, when determining how much to spend on a property
• Overlooking other important factors, such as marketing the property, potential resale value and market trends

By following these steps, investors will have an advantage with flipping strategies. With this tactic, a minimized risk, and larger profit margin are created.

Final Thoughts

The 70% rule is an important principle in house flipping that can help maximize profits and minimize risks. By following this rule, investors can avoid overpaying for properties and protect their cash flow ability to be able to continue to invest in more investment properties over time. With the right strategy and planning, every investor can succeed in the realm of house flipping.