House flipping is about far more than Demo Day, shiplap, and the passing of the baton. While you’ve probably seen TV shows that depict property flipping as a 60 minute process that ultimately results in a win-fall of profit, there are some things that you will need to know if you want your property flipping business to be a success. One such factor is what established property flippers consider the “70% Rule.” That rule is the formula used by investors to determine the most that they can pay for a property and still make money after they fix it up and re-sell it. Here’s a more detailed look at the formula that could spell the difference in your success and failure.

The 70% rule essentially states that you should never pay more than 70% of the after repair value (ARV) minus repair costs when you’re bidding on your potential investment property. For example, if a property’s ARV is $100,000 (based on comparable properties, market forecasts and all other factors) and the property needs $25,000 worth of work, the investor shouldn’t pay more than $45,000 for the property:

100,000 x 70%=70,000

70,000 – 25,000=45,000

That number would allow you to profit approximately 30% after the home sells. If homes in a market are selling for $100,000 and you have to spend $25,000 to repair it but you bid $75,000 for the property you’ll be lucky to break even. Understanding the 70% rule will ensure that you’re leaving enough money there to make this venture worth your while.

While the 70% rule is a great tool to use as a general rule, it is important to remember that the most important aspect of any real estate transaction is location. Some housing markets may not lend themselves to following this guideline fully. Depending on your market you may be able to grab and rehab a flip property for less than 70% while other markets may dictate that you get closer to 75%. The important thing is that you need to familiarize yourself with your numbers before you sign on the dotted line and make any final decisions on purchasing your investment property.

Best of luck on your house flipping adventure. Hopefully you get even more than a 30% profit.