How do you know if a house is a smart investment or a good property to flip? You may be looking to acquire properties for your portfolio. The problem is it can be a struggle to identify good deals quickly. Read on to learn how the 70% rule will help you.
The 70% Rule is a Simple Rule of Thumb.
Investors and flippers should use the 70% rule to determine whether to buy a property. The rule states that you should only pay 70% of the after repair value of a home.
An example would be a $175,000 home that needs $10,000 in repairs. After repair, it would be worth roughly $200,000. A flipper or investor should only pay 70% of that. The total they should pay is $140,000 for the home.
This protects them from overestimating the value of the home. It also protects against downturns in the market.
Speculating that a property will increase in value can be very dangerous. Seasoned investors prefer to make money when they buy to minimize their risks. This also protects them in case they missed something.
Other Factors To Consider For the 70% Rule.
You should also consider a few other factors. Settlement costs, financing costs, and carrying costs take a large chunk out of the deal too.
Closing costs on a $200,000 property could easily be 2 to 5% of the property. This means it would be up to $10,000. Financing costs would likely be around $5,000.
You should subtract $15,000 from your offer price to account for these factors. Some sellers may not discount the whole amount. It is better to get some of these off the cost to protect your margins.
Exceptions to the 70% Rule
The 70% Rule is a simple rule of thumb for finding rentals and flips. It is only a starting point. There are other circumstances where you might want to ignore it.
One of these cases will be if you’re holding the property long-term. Then, you would not spend as much on renovations.
You would be more concerned about the cash flow. Getting a good deal would still be necessary. A better price will still allow you to get lower monthly payments. Lower payments will help you with cash flow.
Take the time to determine your situation and goals. Are you looking to get quick cash? Other times you’ll be looking for steady returns over the long-term.
The 70% rule is a good rule of thumb. You should always be cautious with your repair and closing costs. It is a good starting place to protect your profits.
An essential skill in making a house flipping profit in the real estate business is knowing how to value a house properly. For individuals who are in the industry to make profits from low purchases. Here are ways to determine worthy homes to flip.
Average Value Determination: The house post-rehab value is determined by considering the cost of the houses in the general vicinity and the price of recently sold homes similar to the post-rehab vision. The final worth after repairs is the value you use for determining the worth of the house.
Standard cosmetic rehab: A general rule to estimate repair costs is $20 for every square foot. Based on this assumption, adjustments can be made upwards or downwards depending on the individual house’s specifications. This value will help determine whether to select the house for flipping.
Transactional expenses: Purchase closing costs are usually paid by the seller and account for 0.5 percent of the purchase price. The selling closing costs range between 1-6 percent, with an additional 1 percent as attorney fees. Holding costs such as property taxes, insurance, utilities, and maintenance costs should also be considered.
Offer price-setting- There are formulas to determine what offer price will be stated. One way is to get 70 percent of the average repair value deducting the repair costs. Another way is to subtract the repair costs, closing and holding expenses, and desired profit from the ARV to get the right offer price.
Geographical setting: Proximity to facilities such as shopping malls, transportation services, and school increases the property’s value while highways and airports decrease it. Different locales may have various school taxes, municipal and private trash collection companies with different days.
Physical attributes: As much as the seller wants the house to stand out, it shouldn’t be so significantly marked up in features that it overshadows the neighboring houses. It will only lead to a scenario where it will be too costly for that neighborhood. The most successful house flips are those that have the most work. However, if structural issues are suspected, it would be wiser to buy a house in better condition.
Lenders- Rehab lenders give between 65-70 percent of the ARV. This factor is because an investment is made with the anticipation of making money in the end. If the lender advises otherwise, then there will not be enough equity for the investing party to make money in the end.
Selling your house may not be easy as you may think. Between getting it ready for showing and finding the best realtor to sell it for you, it’s a hectic and overwhelming process. There’s nothing as bad as placing your home on the market, only for it to remain unsold months later.
To increase the resale value of your home, it would help to be proactive about repair and maintenance. Planning a remodel job may also go a long way in adding value to your home when it’s time to sell it. Here are 3 home renovation projects you should do if you’re looking to sell your house.
A Bathroom Upgrade
Renovating your bathroom is one of the easiest ways of increasing the value of your home. Such a project will make it possible to install completely new plumbing fittings and fixtures.
You could also take advantage of this opportunity to put in shower heads that consume less water each minute, and toilets that utilize less water during each flush. This way, your new bathroom will lead to less water wastage, leading to cheaper water costs. This is bound to have a heavy impact on the house’s resale value.
Finished Basement Space
Having a completed basement will help ensure that your home is properly insulated. This means that there will be less leakage of heat into and out of your home, implying that you’ll spend less money cooling and heating up your house. It will also provide extra space that could serve as a wine cellar, gaming room, or even a family TV room. A finished basement is more than likely to jump out to a homebuyer that’s looking for maximum space.
Upgrade the Kitchen
The kitchen is arguably the most important room in every house. By providing the space to cook good and nutritious food, a functional kitchen plays a key role in making sure you and your household lead a healthy lifestyle. Renovating your kitchen would, therefore, be a great way of adding value to your home before putting it on sale.
Remember to upgrade the flooring, countertops and cabinetry to something new and elegant. If you can, put in a new kitchen island- this will make the kitchen even more functional.
Calling in a professional remodeling service will make sure you have someone you can entrust your home to. Although some home renovation projects may be quite expensive, it’s possible to get almost all your money back when you put your house on the market. These projects have great return rates, and will make sure you sell your home without having to compromise on prices.
An investment property can be a highly lucrative opportunity for all kinds of investors. Even so, these types of investments do require a bit more hands-on maintenance than other investment vehicles. Fortunately, it is quite easy to increase the value of an investment property. To do so, homeowners must only complete minor upgrades that will significantly improve the overall aesthetics of the property in question.
To get started with your upgrades, first look for minor cosmetic improvements that can be made. For instance, the flooring within many rentals often becomes quite damaged over time. By simply regrouting and deep cleaning tile flooring in the kitchen and bathrooms, you may instantly improve the overall aesthetics of your property. This goes for the rest of the house too. Renters love clean properties. The cleaner are you able to make every surface found throughout your property, the more desirable will it become in the eyes of discerning renters.
A fresh coat of paint on interior surfaces may also go a long way towards convincing renters to occupy a property. Fresh paint can instantly cover up any scuff marks that were created by past tenants while also allowing you to customize the property’s appearance. Try to avoid choosing paint colors you would personally enjoy having in your own house, though. When selecting a paint color, it’s essential to use a color that is widely accepted so that your property may appeal to the highest number of potential renters.
The same principle may be applied to the exterior of your property as well. Dirt and grime build up over time on the exterior of every house. By simply washing down the exterior of your property, and giving it a fresh coat of paint, you can make the entire house look just like new. If you also make the wise decision to add some color through the addition of a few new plants here and there, you will undoubtedly be rewarded for your efforts.
While minor, aesthetic improvements will definitely help to boost interest in a property, they are not the only upgrades that should be made. To ensure your renters will want to occupy your property for many years to come, it is also important that every aspect of your property be in good working order. Replacing hinges on doors and upgrading the hardware on kitchen cabinets will provide renters with an excellent experience that will keep them satisfied for many years to come.
As a real estate investor, making your property appealing to potential buyers or renters is a step in the right direction towards getting a return on your investment. While you might want to stray away from full “fixer-uppers” (at least until you gain enough experience), there are some renovations you might want to consider to add value to your investment property.
The floor throughout your property plays an important role in the renovation process. Is there carpet throughout? Or, can you find the hidden gem of original hard-wood? Figure out what interior look you’re going for, or look into current trends. If you want to keep the originality of the flooring, you can have them sanded and refinished for a fresh new look.
Updated Kitchens and Bathrooms
As we’ve mentioned, a full flip is a significant challenge unless you have the experience and resources. But, rest assured, there are a few great ways to update a kitchen without completely breaking the bank. Kitchen cabinets are often a focal point of what potential tenants or buyers are looking for. Cabinets are great to work with; if they have a good base and minimal damage, a quick sanding and fresh stain or a new coat of paint can go a long way. Finish them off with new hardware to complete the updated look. For countertops, you may want to consider replacing them if the current ones are dated.
Paint, Paint, Paint
A fresh coat of paint in each room goes a long way in “sprucing” things up a bit. Choose popular colors that are surrounding what’s currently trending. This is where you can have a little fun and figure out what potential renters or buyers are looking for.
Your focus shouldn’t just be directed toward the interior of your property; exterior matters just as much. Make sure your investment property is appealing to anyone that might be interested. Keep the grounds maintained well and consider a few different landscaping or garden options. The property being well kept on the outside is a great first impression.
Television reality shows, like Flip This House, give a skewed impression of the reality of flipping a house. Unfortunately, many new investors jump right in, believing they will make those big paydays. They often end up disappointed and taking huge losses. While every house won’t sell for as much as reality television implies, there is still money to be made, if you act wisely.
How Much of a Profit Can You Really Expect?
It’s difficult to give an accurate estimate because the only way to measure this is by looking at all home sales. The sales in a given region within a specified time frame provide the general home sale price for properties in that area. For instance, ATTOM reports that housing sales averaged $65,520 in the second quarter of this year, but that number doesn’t differentiate between fix and flip investments and other residential sales.
When going directly to investors for information, it’s estimated that they make an average of $30,000 on each fix and flip. This is acknowledging that some investments may bring in less, while others may bring in more. It depends on the overall value of the home, the resources invested in its renovation, and the health of the market in that area.
How Can You Maximize Your Potential Profits?
While you may not be able to do much about the health of the market, you can act to affect the home’s value
by renovating wisely. The real trick is to spend as little as possible on repairing the property and getting it back on the market quickly. As a general rule, the more time you spend fixing up a property, the bigger the chance that something major will eat up your resources.
One thing to keep in mind is not to update features that won’t boost the home’s resale value. When a buyer is interested in the property, their lender will send an appraiser out to inspect the property. If the appraiser doesn’t agree with your estimate of the home’s value, you’ll likely lose money on those upgrades. It’s a good idea to consult a realtor, or a private appraiser, for insight into the upgrades you want to make.
Overall, you will want to keep upgrades simple and cost-effective. Bear in mind that major upgrades may not appeal to homebuyers, who will likely remodel to add their own style, anyway. Look for properties that can be made sale-ready with just some simple and relatively cheap improvements to maximize your return on investment.