trying to work out what "all-in costs" actually includes in the 70 percent rule

Question

Every explanation of the 70 percent rule says the same sentence: pay no more than 70 percent of ARV minus repairs. I can do that arithmetic. What I can't figure out is where the boundary of "all-in" sits.

Someone in a video said the 30 percent gap covers your holding costs, your selling costs and your profit, so the offer price is purely the offer price. Someone else wrote that all-in means purchase plus closing costs plus loan points plus everything, which would push the offer down by several thousand more. Those give different answers on the same house and I don't want to be the person who's consistently 5k high on every offer without knowing it.

Say ARV 300k, repairs 25k. Rule gives 300 times 0.7 is 210, minus 25 is 185. Is 185 my offer, or is 185 the ceiling on offer plus my buying costs plus my carrying costs?

Rena Guide · Accepted Answer

185k is your maximum offer, and repairs are the only cost already subtracted out of it. That's the strict version of the rule as it's normally used.

The 30 percent you're leaving on the table is meant to absorb four things at once: what it costs you to buy, what it costs you to hold, what it costs you to sell, and your profit. On your numbers that gap is 90k of ARV. Closing and lender fees on the buy might be 4 to 6k. Six months of interest on a short-term renovation loan, plus insurance, utilities and taxes, might be 12 to 18k depending on your rate and how much you borrowed. Selling costs at 6 to 8 percent of 300k are 18 to 24k. Add those and you've spent maybe 40k of the 90k, so profit is what's left.

So both things you were told point at the same 185k. The video was describing the rule as written. The other person was describing what the rule is invisibly paying for, and got the boundary wrong by moving buying costs to the wrong side of the equation.

Where the rule really fails is on repairs. Your 25k has to be a real scope with real prices, not a guess, because a 10k miss comes straight out of profit and doesn't move the offer at all. And 70 is a convention rather than a law. In low-priced markets where fixed costs eat a bigger share of a small ARV, operators often work to 65. In expensive markets where 30 percent of ARV is a very large dollar cushion, some will stretch to 75. The percentage is a way of pricing your risk, so pick it deliberately.

dpatel_re · Answer

I stopped using the rule as an offer formula and started using it as a screen. It tells me in four seconds whether a listing is worth an hour. Then I build the actual number backward from a target profit: ARV minus selling costs minus holding minus renovation minus buying costs minus the profit I need, and whatever's left is the offer. On quill's house that might land at 178k or 191k depending on my rate and my exit timeline, and the 185k is just a coincidence in the middle.

karen_whitfield · Answer

The line that matters in @sextant's version is holding cost, and it's the one you can't fully control. I buy land and sit on it, so a slow market costs me nothing. A flipper on a bridge loan is paying rent on money every single day.

priya_n21 · Answer

Question that might be dumb. If the 30 percent is supposed to include profit, and 30 percent of 300k is 90k, why is the typical actual profit closer to 20 or 25k? Is everyone just paying more than the rule says?

ehernandez74 · Answer

@marlow mostly yes, from what I can tell reading listings in my area for the last while. On-market cosmetic candidates get bid to a point where the rule would say walk, so the people buying them are either working to 78 or 80 percent, or they've got a lower renovation cost than I'd have, or they're accepting a smaller profit for a faster turn. I haven't resolved which of those it is and it's the main reason I haven't offered on anything yet.

trying to work out what "all-in costs" actually includes in the 70 percent rule

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