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Hey everybody!

Welcome back to another Saturday newsletter discussing the topics of real estate and financial freedom.

This week’s topic discusses the 70% Rule and what it means for real estate investors.

To begin, this week’s topic may be of interest to the active investors on my email list more than the passive investors, but I’m hoping everybody can still learn something new and see how a potential deal is analyzed.

The 70% rule is what investors use when they are analyzing a potential property that they plan to renovate and either flip or hold as a rental.

The basic idea is that investors should pay no more than 70% of the After Repair Value (ARV) for a home minus the repair costs.

In order for the investor to make a desired profit on the back end, this is the typical rule to follow.

With all things, this is simply a guideline. It is not a one-size-fits-all approach but it is a great starting point.

Since residential real estate is valued differently than apartments, it is important to understand how to come up with the After Repair Value (ARV).

To find the After Repair Value (ARV) number, you will need to find comparable properties in the neighborhood that sold recently. This can be done using a paid software or by getting comparables from your real estate agent.

Agents will specifically be looking at properties sold in the last 6 months that have a similar bedroom and bathroom count. It is also important to look at the age of the property and the renovations completed.

I recommend using both software and real estate agents when starting out to get a better idea of numbers in the area you are looking to invest.

Once you find a deal that you are interested in, the next step involves walking the property and making a repair budget.

When it comes to making a repair budget, I always recommend walking the property with contractors. They will help you get a good idea on what the total costs will be for the project and will break down the scope of work with different line items for each repair.

Here is a quick example of using the 70% Rule:

After Repair Value: $150,000

Repair Budget: $50,000

When we apply the 70% rule, we get the following:

$150,000 x 70% equals $105,000.

$105,000 - $50,000 (Repair Budget) = $55,000 Maximum Offer

So far in my real estate investing journey, I’ve managed 3 full rehabs with a general contractor from start to finish and 1 minor rehab.

And I know from experience, that the repair budget will tend to go over more often than not. That’s because there are things in the house that you won’t know about until after you buy it.

Obviously, a professional inspection prior to purchase will help you find most things, but as everybody knows with property, some things you just can’t plan for.

I always recommend leaving a 10% margin in the budget for the unexpected things that will inevitably pop up.

In conclusion, the first few deals may be difficult, but as with everything in life, the more you do something the better you will get at it. Practice makes perfect.

I hope this week’s topic was helpful for new investors and a refresher for others.

Thanks again and have a great weekend!

-Caleb