Real estate investing can be a highly profitable venture, but it's essential to understand the rules of the game. The 70% rule is a simple calculation that can help investors identify potential investment opportunities. It states that investors should not pay more than 70% of the value after repair (ARV) of a property minus the cost of the repairs needed to renovate the home. To calculate the maximum price you should offer when buying a home, multiply the value after rehabilitation by 70% and then subtract the renovation costs. The 70% rule is a quick and easy way to determine what should be the maximum price offered for a property.
However, it's just a starting point and investors must complete a more detailed financial analysis of all the costs involved in the operation. Additionally, there are a number of additional costs to consider when buying a home that aren't factored into as part of the 70 percent rule. While the 70 percent rule is a useful way to estimate potential profits, it's not the only factor to consider when investing in a house to exchange it. By using this real estate investment rule, investors are aiming for a 30% profit margin on the home exchange transaction. To generate an accurate estimate of the value of the home after renovations have been completed, investors should analyze the last known sales price of comparable properties (offsets) in the area.
This amount can be used as a guide for an offer, although some tweaking may be necessary to find a number that works for both parties. The 70% rule is still a reliable way to create an indicative amount for the maximum purchase price when executing a correction and exchange operation. However, overanalyzing properties so that none of them meet incredibly high standards won't get investors where they want to go. It's important to remember that financing costs, closing costs, lender fees, mortgage points and maintenance costs will reduce the net profit when the house is finally sold. In conclusion, understanding and applying the 70% rule is an important part of successful real estate investing. It's essential to take into account all costs associated with buying and selling a property in order to maximize profits.
Additionally, investors should always do their due diligence and research comparable properties in order to get an accurate estimate of what they should pay for an investment property.