Have you ever wondered what the formula is to make money in real estate? Guidelines or rules can help you gauge profitability and improve your results before you invest in a home to flip and resell quickly, or a rental home.
Home flippers use the 70% rule, meaning that the maximum price you pay for a property to flip should be no more than 70% of the home’s after-repair value (ARV) minus the costs of improvements. Rocket Mortgage suggests you determine the maximum selling price by studying comparable area homes in similar condition to your planned renovations. Use this calculation: The After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price.
For real estate rental properties, the 1% rule and the 50% rule are quick ways to determine if a property is a good buy-and-hold investment. The 1% rule means you should be able to charge no less than one percent of a property’s purchase price: $300,000 purchase price = $3,000 gross monthly rent.
To help you determine cash flow, Smartasset.com suggests that a property’s operating expenses should be roughly 50% of its gross income. If the property generates $3,000 a month in gross rent, the 50% rule is that you earmark $1,500 for expenses, excluding mortgage payments, HOA fees and property management costs. Whatever remains is your net operating income.
These percentage rules are only guidelines. Investors should research market conditions and plan for vacancies, unexpected repairs, and the possibility of rising operating costs.