The Numbers Game in Real Estate: Why the 70% Rule is Flawed

Numbers have everything to do in the real estate investment business. Bid the right numbers, and they can cut the deal for you. They can bring you big returns on sale; they can help you become the real estate king. Bid the wrong numbers, and they can leave you with a bad deal; you could scramble for profits or, worse, struggle to break even.

Considering how important numbers are when making an offer for a property for investment purposes, we’d like to dig a little deeper into this game of numbers. While doing so, our aim would be to help you find the right formula for calculating the right offer for any given property.

So, what say? Shall we start?

How Most Investors Work with Numbers

There is this well-known “70-percent” rule that many modern-day investors use to calculate an offer when making a bid for a property.

The rule states:

You take the after repair value of a property (the value at which you expect the property to sell later) and multiply it by 0.7 (seventy-percent). From the result, you then subtract all the expenses that you expect to incur along the way, and this will give you your “maximum bid.”

Let’s say, you find a property that you think will eventually sell for $450,000. You estimate that you’ll have to pay $30,000 in various costs along the way. Using the 70% rule, your maximum offer price should be:

illustration

Since you’ll be paying $285,000 for the property and $30,000 in closing and improvement expenses, your total investment for this acquisition will be $315,000. Since you then plan to sell the property for $450,000, you’ll earn a net profit of $135,000.

That’s not bad, to be honest.

However, there are some concerns with this equation.

  • What if the market dips and you’re not able to sell the property for $450,000?
  • What if the after repair value that you have assumed is incorrect to begin with?
  • What if the remodeling ends up costing you more?

There are just so many uncertainties involved here, and these are legit uncertainties. The great recession is a proof that things can go south anytime—without warning.

Therefore, you need to aim for more. You need a greater profit margin to make yourself feel comfortable. You need to safeguard yourself against any and all possibilities of getting burnt by uncertainties.

sign

The Right Formula

So what do we recommend?

GCP Fund has helped hundreds of real estate investors with their capital needs for their various real estate investment projects.

In fact, many of our experts run their own real estate investment ventures, and they run them quite successfully.

Based on our experiences, we have found that the 30% rule works best when it comes to calculating an offer for a property.

The math works the same way as the 70% rule; the only difference is you swap 0.7 with 0.3 when doing the calculations.

You may find this as “lowballing”. But trust us, this formula works; you just need to find the right demographic of sellers to target.

These sellers are motivated sellers, and they’re usually looking for a quick sale. They’re less interested in the money which they’ll get from the sale and more interested in finding a solution to their problem, which is to look for interested buyers.

You can help them solve their problem, and in return, you can make serious money from your real estate investment ventures.

That’s it from us for today; we hope you found the read informative and helpful.

About GCP Fund

GCP Fund is a leading national hard money loan and bridge loan lender headquartered in New York. The company provides a complete range of hard money loan products to clients for their real estate investment and business expansion needs. For more details, call 1-800-514-7350 or email at contact@gcpfund.com.

Categories: Real Estate

Leave A Reply

Your email address will not be published.