The 70% Rule is Wrong (2024)

FAQs

Does the 70% rule work? ›

The 70% rule doesn't work as well if you want to buy a home and hold onto it for years, perhaps renting it out while you wait for its value to increase. It's difficult to guess how much a home will be worth in the future, and if you can't accurately predict a home's after-repair value, the 70% rule loses its value.

So, for example, if you estimate that a home's ARV is $500,000, you would multiply that amount by . 70, resulting in a price of $350,000. You would then subtract the estimated price of renovations. If you predict that the house requires $50,000 in renovations, then your maximum purchase price would be $300,000.

The profit per flip in California may not be as high of a percentage as in some other states, but California flippers can still make a substantial profit. The average flipper in the state had a gross profit margin of about 16% and a profit of $92,500 in 2022.

The Short Answer

In 2022, house flippers generated an average gross profit of over $70,000 per property, according to ATTOM Data Solutions. In 2023, house flipping will remain a profitable real estate investing strategy and some of the best cities to flip houses could suprise you.

The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase.

The Rule of 72 is derived from a more complex calculation and is an approximation, and therefore it isn't perfectly accurate. The most accurate results from the Rule of 72 are based at the 8 percent interest rate, and the farther from 8 percent you go in either direction, the less precise the results will be.

The rule of 70 offers a way to figure out the doubling time of an investment. In other words, it shows you how many years it will take for your initial deposit to double in size. You'll need to know the specific rate of return in order to use the rule of 70 or doubling time formula.

The rule of 70 approximates how long it will take for the size of an economy to double. The number of years it takes for a country's economy to double in size is equal to 70 divided by the growth rate, in percent.

$100,000 is plenty for the rehab, closing costs, and other fees that come along with real estate investing. You'll need a hard money lender for the bulk of your project, but you can flip homes for much less than $100,000—even less than $5k when done right.

You absolutely can. Research your market, come up with a flip strategy (what type of house you will want to purchase, how you plan on finding this property, what area you want to purchase, how you will come up with financing), find the property that fits this strategy, secure the financing, and close on the deal.

Do house flippers pay taxes? ›

In most cases, that would cause the IRS to classify you as a dealer. As a dealer, you have to pay regular income tax on the profit you make from flipping houses. You also pay a self-employment tax of 15.3%.

Utah and Missouri establish themselves as the best places to flip houses in terms of low remodeling costs. New Jersey, meanwhile, has the lowest rental vacancy rate. West Virginia boasts the highest homeownership rate in the US and the lowest housing costs.

2023 is a balanced year for housing supply and demand. This is ideal for retail purchasers and rental property investors. No longer a “seller's” market. Rising interest rates raise the monthly mortgage payment, which reduces homebuyers and lowers property values.

Flipping a house could require several hundred thousand dollars or almost no upfront money of your own at all. Everything from location, to condition, to your credit score can impact how much money is needed to flip a house. And no two flips are exactly alike, which means the cost changes from project to project.

What is Rule of 69. Rule of 69 is a general rule to estimate the time that is required to make the investment to be doubled, keeping the interest rate as a continuous compounding interest rate, i.e., the interest rate is compounding every moment.

The so-called Rule of 42 is one example of a philosophy that focuses on a large distribution of holdings, calling for a portfolio to include at least 42 choices while owning only a small amount of most of those choices.

According to the Rule of 72, it would take about 14.4 years to double your money at 5% per year.

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

Currently, money market funds pay between 4.47% and 4.87% in interest. With that, you can earn between $447 to $487 in interest on $10,000 each year.

What is the problem with the Rule of 72? ›

Other than the fact that this is only an estimating tool, the other issue with the rule is that it generally applies to longer periods of time. When estimating over longer periods, the ability to achieve consistent returns is problematic, so the actual returns achieved are likely to vary from what the rule indicates.

Limitations to the Rule of 72

The rule only applies to investments that offer a fixed rate of return. If the investment offers a variable rate of return, the actual period required for doubling could be materially different. The rule only applies only works for periods of time long enough for an amount to double.

The Rule fo 70 Even Applies to Negative Growth

The rule of 70 can even be applied to scenarios where negative growth rates are present. In this context, the rule of 70 approximates the amount of time it will take for a quantity to be reduced by half rather than to double.

What Is a Limitation of the Rule of 70? The Rule of 70 assumes a constant rate of growth or return. As a result, the rule can generate inaccurate results since it does not consider changes in future growth rates.

It states that the number of years required for a value to double in size is 70 times the growth rate. A. It is fairly accurate for small growth rates.

You can also use the rule of 72 for expenses like inflation or interest: If inflation rates go from 2% to 3%, your money will lose half its value in 24 years instead of 36. If college tuition increases at 5% per year (which is faster than inflation), tuition costs will double in 72/5 or about 14.4 years.

The Rule of 70 tells us the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable's annual growth rate.

The BRRRR strategy is no different. Flippers like to use the “70% rule” for determining a strike price. This rule states that the most an investor should pay for a property is 70% of the After Repair Value minus the estimated rehab cost.

Paying cash certainly eliminates the cost of interest, but even then, there are holding costs and opportunity costs for tying up your cash. Even if you manage to overcome the financial hurdles of flipping a house, don't forget about capital gains taxes, which will chip away at your profit.

ATTOM has measured house flipping activity since 2005 and found that the practice was most profitable, in pure dollars, in 2021 — when investors pocketed an average $70,000 per property. Investors profitted the least amount in 2008, racking in a mere $30,000 per flip.

What is an illegal property flip? ›

A con artist buys a property with the intent to re-sell it an artificially inflated price for a considerable profit, even though they only make minor improvements to it.

One of the biggest risks is that you could end up losing money if you're not careful. It's important to do your research and have a solid plan before you get started. If you're not experienced in flipping homes or real estate investing, it's probably not a good idea to go it alone.

If you want to flip a house without any money, your options are: 0% down loans (for a live-in flip), hard money lenders, private lenders, wholesaling, and seller financing. Read more about how to flip houses when you're strapped for cash.

The law demands that mortgage companies report large transactions to the Internal Revenue Service. If you buy a house worth over $10,000 in cash, your lenders will report the transaction on Form 8300 to the IRS.

How can house flippers minimize or avoid taxes? Some house flipping advisors may tell potential investors that they can defer the recognition of the capital gains (and the tax) by reinvesting the proceeds using a 1031 exchange.

Look into a 1031 Exchange

If you're looking to continually fix and flip and make your side hustle a full-time job, a 1031 like-kind exchange is a great tax strategy for flipping houses. In a 1031 exchange, you can defer capital gains tax liability on the sale of an investment property.

What is the hardest part of flipping a house? Finding the right property (at the right price), budget management and unforeseen structural issues are often considered some of the biggest challenges that house flippers will have to face.

It takes on average, six months to one year to flip and sell a property. The faster a flipped house is sold, the greater the profit will be. Getting stuck with a house that you're not going to sell or live in for a while can quickly sink your savings and even bankrupt you due to maintenance expenses.

Technically speaking, there aren't any regulations stating you may only flip 'X' number of houses per year. It depends on your finances, time management, and the availability of homes in your area. The average real estate investor flips 2 to 7 homes a year.

The combination of persistent buyer demand and low inventory has driven property prices up. There are fewer sellers, so prospective buyers need to contend with higher housing prices. As such, if you buy a home in 2023, you're likely to pay a premium.

Will interest rates go down in 2023? ›

“[W]ith the rate of inflation decelerating rates should gently decline over the course of 2023.” Fannie Mae. 30-year fixed rate mortgage will average 6.4% for Q2 2023, according to the May Housing Forecast.

Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.

Flipping a home is another option for investing 50k. To do this correctly, you need to buy an existing property with the plan of reselling it at a higher price within 12 months or less. This is an excellent option if you have time and money to put into it.

You could make $1 million a year flipping houses, but it is not as simple as it may seem. To run an operation large enough to flip low-margin houses, you will need a team and a lot of help. There are many costs involved that eat into that profit.

$100,000 is plenty for the rehab, closing costs, and other fees that come along with real estate investing. You'll need a hard money lender for the bulk of your project, but you can flip homes for much less than $100,000—even less than $5k when done right.

So, the rule of 70 is a better estimate. The rule of 69 gives more accurate results for continuous compounding (extreme compounding where you reinvest the interest continuously as often as possible), such as monthly or daily.

ATTOM has measured house flipping activity since 2005 and found that the practice was most profitable, in pure dollars, in 2021 — when investors pocketed an average $70,000 per property. Investors profitted the least amount in 2008, racking in a mere $30,000 per flip.

The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.

Flipping a home is another option for investing 50k. To do this correctly, you need to buy an existing property with the plan of reselling it at a higher price within 12 months or less. This is an excellent option if you have time and money to put into it.

How do people afford to flip houses? ›

If you don't have enough cash to flip a house without financial help or have the cash but want to limit your risk, there are several ways to get funding. A hard money lender, private lender, or real estate crowdfunding site can help you achieve your house-flipping dreams.

The so-called Rule of 42 is one example of a philosophy that focuses on a large distribution of holdings, calling for a portfolio to include at least 42 choices while owning only a small amount of most of those choices.

Assuming long-term market returns stay more or less the same, the Rule of 72 tells us that you should be able to double your money every 7.2 years. So, after 7.2 years have passed, you'll have $200,000; after 14.4 years, $400,000; after 21.6 years, $800,000; and after 28.8 years, $1.6 million.

Property flipping is a common practice in real estate. It involves buying a property and then reselling it for more money. Usually, when someone flips a property, he or she makes repairs and improvements beforehand. It can become illegal if the person falsely represents the condition and value of the property.

Flipping enough houses can certainly make you rich. It can even be a great career, especially for those who want to be their boss, set their hours, and have the opportunity to earn a significant income. But flipping houses is an investment that is fraught with risk.

The most obvious risk of flipping houses is losing money. The worst thing that can happen on your flip (besides someone dying or being severely injured), is that you spend 4 to 6 months rehabbing a house only to wind-up losing money on the project.