The 75% Investor Rule

Navigating the real estate market can often feel like you need a degree in finance or a seat at the auctioneers' table. Fortunately, there’s a remarkably straightforward formula that can simplify your investment decisions, especially when you're out scouting properties and need a quick financial assessment. It’s known as the 75% Investor Rule.

Understanding the Formula:

The formula is straightforward:
ARV × 0.75 − Repairs = Purchase Price

Here, ARV stands for “After Renovation Value,” which is the price you expect to sell the property for once improvements are made. Essentially, you should aim for your purchase price to be 75% of the ARV, minus the cost of any repairs. This calculation automatically integrates a 25% cushion to cover unforeseen costs, helping to ensure a profitable outcome. Additionally, by taking on some of the renovation work yourself, you increase your margin, adding more value to the property.

Example for Clarity:

Let’s consider a property listed at $450,000, which needs $30,000 in renovations. You estimate that, once renovated, the property could fetch $525,000. Applying the 75% Investor Rule:

$525,000 × 0.75 − $30,000 = $363,750

This means you shouldn’t pay more than $363,750 for the property to ensure a safe margin of profit after accounting for repairs, closing costs, and the inevitable unexpected issues.

Real World Application:

Take the case of a rental property we owned in Tacoma—an old craftsman-style house. We faced a decision: renovate it or sell as-is. The as-is price was around $300,000, but we calculated that with $40,000 in renovations, we could significantly increase its value. Using our trusty formula in reverse to find the necessary ARV:

$300,000 + $40,0000.75 = $453,3330.75

However, market conditions suggested a maximum achievable sale price of $440,000. Despite the numbers, we went ahead with the renovations knowing that there was some definite profit available, even if not ideal. Eventually, the house sold for $442,575, yielding a 30% gross profit—slightly below the 33% target advised by the formula but sufficient for our goals, allowing us to upgrade to a better property.

Conclusion:

The 75% Investor Rule is a powerful tool that simplifies the complex equations of property flipping into a quick, easy-to-use formula. Whether you're a seasoned investor or a first-time flipper, it helps you quickly assess potential deals on the go.

Still unsure how to apply this rule to your potential investments, or need help evaluating a property? Don't hesitate to get in touch with us. We’re here to help you make the most out of your real estate ventures, ensuring every decision is as profitable as possible. Contact us today, and let’s start turning those real estate opportunities into realities.

Don & Susie Karstedt
253-987-6789