What Is The Real Estate 70% Rule
I spoke about the 1% or 2% rules as quick ways to just kind of decide if you want to look further at a deal that comes your way. I don't typically follow the 1% or 2% rule because I have very specific real estate wants. I want to get my equity back out. So every deal I purchase, I want to actually get all that money back out so I can actually put it onto the next property, so I'm just basically reusing the equity. And for that, we would use the 70% rule.
Basically the 70% rule is that you'll be willing to pay no more than 70% of a property after market value or it's repaired value. So once you purchase the property and you renovate it, how much will that property now be worth? That would be my all-in-cost. And what all-in-cost means is my cost to acquire the property, to pay the seller, to pay title insurance, to pay transfer tax and the cost of renovation. So if the property were to cost me $50,000 to pay the seller, pay title insurance, pay transfer tax, all those good things, and a renovation is going to cost me $20,000, then my all-in-cost will be $70,000. And if the after repair value is $100,000, then that meets my 70% rule. Then at that point, I'm willing to actually kind of go ahead and put an offer on that property. And probably if it's actually meeting that rule, I would probably be very quick about putting in that offer.
The reason for the 70% rule is because once the property is finished, I'm going to want to approach a lender and I'm going to say, Hey, I've got a property and it's worth a lot more than I owe on it. I have equity in it. I would like you to give me a loan for all that equity. The lender is likely to respond no way, we're not going to give you all the equity that you have in this property, this $100,000 of equity. We'll give you 70 or 75% of that equity. You can find some lender that'll go all the way up to 95. They'll give you 95% of the of the property's value.
I try to steer away from that because I don't want to over leverage myself. 75% is safe. If there was an aggressive market shift or if anything happened and I needed to sell the property, and somehow I couldn't sell the property for the same amount of money because the market so aggressively changed, I've got 30% of room there to keep me and my family safe. I prefer not overextending myself past the 75%.
But again, the 70% rule is basically equal to the fact that I know lender will give me 70% of that equity back out. So if I'm only invested in it's after repair value, 70%, I know I can get all my money back or more from a lender, and then I can just put it right into the next property. Do the same thing - buy the next property shell, renovate it, rent it out, pull the equity back out and do that again and again, and again and again. That's the 70% rule.
I'm Joe White trying to answer your real estate questions the very best I can. Good luck!!!