1. Understand the 70% Rule
The 70 percent rule state that an investor should pay 70 percent of the ARV (After Repair Value) of a property, minus the repairs needed. The ARV is what a home is worth after it has been completely repaired. Although this formula is not a one size fits all, it’s a good method of estimating your budget and the repairs needed for the house in the beginning stages. It’s design is mainly to estimate if the profit potential is worth the risk.
For example, if the ARV (or what you expect to get out of the home once complete) is $200,000 and you expect repairs to be around $40,000, 200,000 x 70% = $140,000 – $40,000 (estimated repairs) = $100,000. That means that an investor should initially pay $100,000 for the home.