what is the rule of thumb for purchasing a real estate property for rehab

by Madeline Waters PhD Published 2 years ago Updated 1 year ago

The 70% rule is a guideline in the real estate investing business that states no bid price at the beginning of a project should exceed 70% of the ARV minus estimated repair costs. This is a rule of thumb that real estate investors should follow to make a 30% return on their investment (ROI).

What is the 1% rule in real estate?

The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.Feb 27, 2022

Does the 70% rule work?

Depending on your goals, the 70% rule might not work for you. This rule generally only works for investors who want to renovate and flip a home quickly. These investors are often buying in neighborhoods that have plenty of comparable home sales that can help them determine a more accurate after-repair value.Feb 28, 2022

What is the 70% rule?

What Is the Rule of 70. The rule of 70 is a means of estimating the number of years it takes for an investment or your money to double. The rule of 70 is a calculation to determine how many years it'll take for your money to double given a specified rate of return.

What is the 2% rule?

The 2% rule is a restriction that investors impose on their trading activities in order to stay within specified risk management parameters. For example, an investor who uses the 2% rule and has a $100,000 trading account, risks no more than $2,000–or 2% of the value of the account–on a particular investment.

What is Brrrr method?

Share: The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment strategy that involves flipping distressed property, renting it out and then cash-out refinancing it in order to fund further rental property investment.Mar 11, 2022

What is the 70/30 rule?

“The 70/30 method is a budgeting technique to help you allocate your money,” Kia says. Put simply, each month, 70% of the money that you earn will be your spending money, including essentials like bills and rent as well as luxuries, and 30% of the money you earn will go towards your savings.Sep 8, 2021

What is the 50% rule?

The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.Feb 17, 2022

What does it cost to flip a house?

This rule says you should pay no more than 70% of the ARV (after repair value) of the home, minus the cost of the repair. Here's how that works: If you think a home would sell for $500,000 after the renovations, and it would cost $20,000 to repair it, your highest offer should be $330,000 [($500,000 x 0.70) - $20,000.]Mar 23, 2021

Where is the rule of 72 most accurate?

Variations on the Rule of 72 Variations on the rule also tend to get used because the rule of 72's accuracy is best limited to a small number of low rates of return. It's most accurate at an 8% interest rate, with 6-10% being its most accurate window.Jan 7, 2019

What is a good IRR for rental property?

For levered deals, commercial real estate investors today are generally targeting IRR values somewhere between about 7% and 20% for those same five to ten year hold periods, with lower risk-deals with a longer projected hold period also on the lower end of the spectrum, and higher-risk deals with a shorter projected ...

What is a good monthly profit from a rental property?

With mortgage payments to contend with and a tough competition, you may only be able to profit $200 to $400 per month on a property. That's $4,800 a year, a far cry from the $50,000 we're talking about for earning a living. You'd need to own over 10 properties profiting $400 per month in order to reach that target.Aug 6, 2012

What is the 5 rule?

What is the Five Percent Rule? In investment, the five percent rule is a philosophy that says an investor should not allocate more than five percent of their portfolio funds into one security or investment.Oct 5, 2021

What are the rules of thumb for real estate?

This can be translated into real estate: real estate investing rules of thumb allow property investors to shorten the amount of time they take to analyze deals and investment properties while still not rushing into making a decision that isn’t right.

What is the 1% rule for real estate?

The aim of the 1% rule for real estate investors is to: Ensure they have a rental income greater or equal to their mortgage payment so they can at least break even on the investment property. Provide a baseline for establishing the level of rent to charge for the rental property.

What are the rules for LTV?

The LTV rule can be used along with other real estate investing rules of thumb to help property investors determine the best and safest type of loan to obtain; one which: 1 Monthly rental income can cover its monthly payments. 2 Costs less than 50% of your gross income each year. 3 Has a low LTV.

Is real estate investment a challenge?

Real estate investing for beginners can be a challenge, especially if you don’t know anything about the business . When you first start to educate yourself about the business, you’ll read that you need to do this or that to become a successful real estate investor and how to determine whether an investment property is a good deal or not – which ...

What is the 1% rule?

The 1% Rule. The first rule is the fastest way to determine if an investment property is worth purchasing – it’ll help property investors figure out if their monthly rental income will cover and exceed their monthly mortgage payments. According to this rule of real estate investing, your investment property should rent for at least 1% ...

Is too much of a good thing a good thing?

However, property investors should understand that too much of a good thing is not always the best option. This rule for real estate investors states that the higher the loan-to-value, the riskier the loan is. The interest rate, points, fees, etc. all affect the cost of a loan – which may rise as the risk increases.

What is a rule of thumb?

Investopedia defines a rule of thumb as “a guideline that provides simplified advice regarding a particular subject.”. The term originated with carpenters who used the width of their thumb to approximate measurements. It was also associated with farmers who used their thumbs to measure the proper depth to plant seeds.

What is the first stage of a property analysis?

Stage 1: Immediate analysis. You will do two basic tests in this stage: the sniff test—not being literal here—and the math test. The sniff test is the basic criteria you have for a property. For example, you’ve decided not to purchase any properties requiring full gut jobs. Then you spot one requiring just that.

What is the 70 percent rule?

For them, the 70 percent rule help determine just how much to pay for a property. The 70 percent rule states that the most you should pay for a potential flip is 70 percent of the after repair value (ARV), which is what it would sell for when it’s all fixed up, minus the repair costs.

What is real estate deal analysis?

Real estate deal analysis is about running thousands of potential properties through a funnel and getting to the one (s) that meet your criteria, in this case, best cash flow.

Who is Brandon Turner?

Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments.

Part 1: Rules of Thumb

First we will start with the general rules of thumb you can use when building your financial analysis spreadsheet to see if the deal will work out numbers wise.

Part 2: Multiples & Ratios

Along with quick rules of thumb, there are also ratios and multiples you can use to compare investments and help in your decision making.


These rules of thumb, financial ratios, and financial multiples are great places to start when analyzing an investment property so that you save time and prevent putting in wasted effort to analyze a deal further if it doesn’t pass initial screening.

What is 70% of a property?

So, the 70% rule was created to help you buy a property at a number that leaves room for realizing a return on your investment (ROI). The rule states that you should only pay 70% of a property’s after repair value (ARV), minus your costs to rehab, if you want to see any returns. Otherwise, you risk thinning out your profits if you see any at all.

What is 70 percent rule?

The ‘70% Rule’ refers to a formula that many real estate investors use to determine the price they should pay when they find a fixer-upper home for sale that they intend to rehab and resell. This number is critical for making a profit in house flipping. If you pay too much for a house in the beginning, you could really pay for it on ...

What are the biggest mistakes an investor can make?

One of the biggest mistakes an investor can make is underestimating repair costs for an investment property . Seasoned investor, Kenn Sok, joined us to explain in detail how to estimate rehab repairs correctly every time.

Who is Kenn Sok?

Kenn is a seasoned investor and has done it all: wholesaling, flipping, and rentals. While he is a developer vocationally, he is still building up his investment business on the side, and is known for his practical real estate investing tips. View all posts by Kenneth Sok

What do you need to flip a house?

Ideally, a house flip simply needs cosmetic work. Things like drywall, flooring, countertops, appliances, paint, finishes, and landscaping are all cost-effective fixes. 2. Use Rules of Thumb. Because real estate deals often come and go within days, you don’t always have a ton of time to figure out an exact cost right away.

How to invest in a fixer upper?

You can’t estimate repair and rehab costs if you don’t know what needs to be fixed. Before investing in a fixer-upper, you must start by taking inventory of the home’s condition and evaluating the problem areas. When investing in a house flip, you want something with good bones.

Why is contingency planning important?

It’s always important to have contingency plans in place in case things don’t go according to plan. In any house flip, it’s a good idea to create “tiers” for your rehab.

The 1% Rule

The first rule is the fastest way to determine if an investment propertyis worth purchasing – it’ll help property investors figure out if their monthly rental income will cover and exceed their monthly mortgage payments. According to this rule of real estate investing, your investment property should rent for at least 1% of the p…
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The 50% Rule

  • The second on our real estate investing rules of thumblist to analyze investment properties is the 50% rule. The rule states that the total expenses associated with running a rental property (taxes, repairs, insurance, property management, turn-over costs, eviction costs, etc.) will average out to about 50% of the gross rent. Related: The 6 Hidden Costs of Owning Rental Property Say that yo…
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  • It’s important to note that, when it comes to real estate investing for beginners, you should not depend only on one rule but, rather, use them together correspondingly to make a smart investment decision. One of the other real estate investing rules of thumbto understand is the Loan-to-Value Ratio. What does this rule state, and how can you use it with the aforementioned r…
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Should Investors Always Rely on Real Estate Investing Rules of Thumb?

  • NO! These are just real estate basics, not a tool that will predict all costs of real estate investing. While you can use them for “back-of-the-napkin” assessments, you shouldn’t rely solely on them to make your investment decisions! Digging deeper and thorough due diligence are essential for successful real estate investing. Property investors looking for more accurate estimations use …
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Final Words on Real Estate Investing Rules of Thumb

  • Well, there you have it – 3 real estate investing rules of thumb that every investor needs to evaluate investment properties. Keep in mind, though, that these are just quick assessments of whether a rental property is worth looking further into, not tools that will always give you accurate results. To take full advantage of the best real estate investment tools out there, sign up to Mas…
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