UGANDA, Kampala | Real Muloodi News | Flipping a house can be profitable. But new investors should realise that this money-making strategy comes with risks. If you’ve never flipped a home before, plan on spending more money than you think while making less than you expect when you sell. As with anything, flipping homes comes with a learning curve.
House flipping is when a real estate investor buys houses, renovates them, and sells them for a profit. For a house to be considered a flip, you buy it with plans to sell it as quickly as possible. The time between the purchase and the sale typically ranges from a couple of months to a year.
However, the critical principle of flipping houses successfully is ensuring that you buy the property at the lowest possible price. When you sell it, you do so at a significant profit.
Therefore, overspending on the house purchase translates into reduced margins in the future. But as a new investor to real estate, how do you determine if the house purchase price is right or not? Well, the 70% rule can help.
What is the 70% Rule?
The 70% rule states that an investor should pay only 70% of a property’s after-repair value, minus the cost of the repairs necessary to renovate the home. (Property’s ARV) x 0.7) – Repairs cost = Highest amount you should pay for the property.
However, it’s essential to note that this rule does not work in the exclusivity of prevailing market conditions and any other factors, direct or indirect, that might influence property prices.
Therefore, use the 70% rule as a general guideline and not as a replacement for long hours of research and consultations. You need to make sure that you are not overpaying for a home you intend to flip.
The after-repair value, or ARV, is the amount that a home could sell for after flippers renovate it. This means that to purchase a property with a sole aim to flip, you need to estimate how much you think the property could sell after you have renovated it.
After establishing the After Repair Value of the property, multiply that amount by 70% and subtract the estimated cost of renovating the property. The resulting figure is the highest price you should pay for that property.
However, keep in mind that this value is not absolute or independent, and therefore sometimes, a flipper may offer 60% of ARV (in a buyer’s market, when homes aren’t selling quickly and prices aren’t rising) or 80% or even 85% (if you are buying a home in a seller’s market, where home prices are soaring and buyers are snatching up homes quickly). The 70% rule may need to be adjusted depending on the market.
Therefore, the key here is to consider the 70% rule as a general rule of thumb. Before buying any home, you need to study market conditions, work with real estate professionals to get a more accurate presale estimate and meet with contractors to determine how many repairs will cost and which renovations are needed.
As an investor in real estate, a key point to keep in mind is that flipping houses is a business like any other; it requires knowledge, planning, and savvy to succeed. Never underestimate the time or money the project will require. Your knowledge, skills, patience and sound judgment are essential in timing-based businesses like real estate investment.
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