The 70% Rule
The 70 percent rule states that an investor should pay 70 percent of the After Repair Value (ARV)of a property minus the repairs needed. If a home’s ARV is $150,000 and it needs $25,000 in repairs, then the 70 percent rule states an investor should pay $80,000 for the home. $150,000 x 70% = 105,000 – $25,000 = $80,000. Buying a house for $80,000 that will be worth $150,000 may seem like an awesome deal, but you have to remember all the costs involved in a fix and flip.
Profits from flipping real estate come from either buying low and selling high, or buying a house that needs repair and fixing it up before reselling it for a profit.
More than 200,000 houses in the United States were bought and the resold with the same 12-month period in 2017. That’s just under 6% of all the single-family homes and condominiums sold all year. The average net profit is between $20,000-$30,000 per property. However, most of the time YOUR time is not included in that number.
Pitfalls of Flipping Houses
- Not Having Enough Money: If you need to finance the flip-house, you need to find a particular lender who understands the condition of the house and the short term lending period. Every dollar spent on interest adds to the amount you’ll need to earn on the sale just to break even. And if you use a mortgage or home equity line of credit to finance your flip-house purchase, only the interest is deductible. The principal, taxes and insurance portions of your payment are not deductible. Paying with cash eliminates interest payments, but you’ll need to have a strict budget.
- Not Having Enough Time: Once you own the house, you’ll need to invest time to fix it up. If you have a day job, time spent on demolition and construction can translate into lots of lost evening and weekends. If you pay somebody else to do the work, you’ll still spend more time that you expect supervising the activity and the costs of paying others will reduce your profit.
- Not Having Enough Skills: The real money in house flipping comes from sweat equity. If you’re handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you’ve got the skills to flip a house. And if you don’t, you will need to pay a professional to do all of the renovations and repairs. Accordingly, the odds of making a profit on your investment will be dramatically reduced.
- Not Having Real Estate Knowledge: You need to know which renovations to make and which to skip. You also need to understand the applicable tax laws and zoning laws, and know when to cut your losses and get out before your project becomes a money pit.
(from 2/19/19 article by
Is Flipping For You?
Flipping houses will likely be harder and more expensive than you ever imagined. And even if you get every detail right, changing market conditions could mean that every assumption you made at the beginning will be different at the end.
This 4-bedroom, 2-bath house was staged for a flipper who understands the value of making a vacant house look inviting and welcoming. People make buying decisions based upon emotional connections. Statistically, this house will sell faster and for more money than if left vacant.
Contact Premiere Stagers & Realty (608-345-9396) for information or showings for this house located just outside Madison, WI.