The 70% Rule has become an extremely common tool utilized by investors who take part in the House Flipping business. Following this rule ensures you don’t ever end up paying over 70% of the after-repair value (ARV) for any given property. This value is determined after the cost of necessary repairs is deducted. The main idea behind this rule is the fact that you must initially determine how much you are able to reasonably spend for the property including any additional repair or rehabilitation costs that may emerge during the process. After that is complete, you can use this number to choose a property on the market that’s within your budgeted price range. When you’re searching for the right property, make sure you estimate how much money you’ll need to make any additional repairs necessary as well.
For example, you can expect the median price for a home in Los Angeles to be about $775,000. If the ARV is determined to be $775,000 and you have to complete about $40,000 worth of repairs to completely renovate the property, you shouldn’t pay more than $570,500 for the initial purchase.
The example calculation is below for your reference:
$775,000 + $40,000 = $815,000
$815,000 x 0.7 = $570,500
As can be seen, the 70% Rule is quite easy to follow and calculate when you’re trying to ensure you don’t pay more money for your investment than you originally intended. Always make sure that you consider the full amount of money you’ll be needing to flip the home which includes the initial purchase price, the cost for additional repairs, the carrying costs, and any amount of money you use towards actually selling the property. Never forget two times closing expenses, when buying and selling property.
The Los Angles marketplace is an amazing location for prospective buyers to invest in the residential real estate that needs a bit of improvement. In order for you to have the best investing experiencing, paying for the real estate with cash will offer you better flexibility to flip the property.
Unfortunately, in most cases, banks don’t provide loans for real estate properties that need a lot of repairs and renovations. The best way to purchase real estate that has proven to be extremely effective for prospective buyers is either from auctions or when the real estate is considered to be “Real Estate Owned (REO)”. Real Estate Owned property is owned by a lender which usually takes form as a bank, the state, a private agency, etc.
The banks are usually happy with listing these homes on the MLS so they can get a reasonable offer on the property. These properties are the most sought-after by prospective buyers because you can purchase them just like you would buy any other home in California. The competition is usually really intense when people are trying to buy homes at a public auction but if you have Leona by your side, you will be able to make smart investment choices that align well with your personal and professional goals.
There are amazing areas to invest in real estate all over Los Angeles. Below is a detailed breakdown of the common districts and which type of investors fall into each category.
Most prospective buyers invest in high-class districts to avoid working alongside the risks that come with D-class areas. When an investor chose to renovate a property located in a low-income area, the insurance premiums tend to be much higher than the actual purchase price of the real estate. When you’re choosing to start the incredible investment of flipping a house, the properties designated in the Grade A or B district are an excellent investment choice.
Los Angeles County is home to 51 cities with a total population of ~10,039,107 people. These numbers accurately demonstrate just how densely populated the cities are within the entirety of the county. This provides a large variety of options for potential investors when they’re deciding which property class and overall area is right for them. The amazing investment options in Los Angeles County also come with a large range of home prices. This contributes to an extremely diverse real estate market that our professional team is very aware of and we help you find investment properties that align well with the current state of the market. The average price for a home in Los Angeles rises about 25% since last year to $775,000. This is a clear representation of the high demand for these beautiful properties. Now, if you solely look at the average price for a home in Beverly Hills, this amount is already $3,535,000 million and rising. It is quite clear that the average selling price is very dependent upon the area in which you choose to invest. Leona Estates will help you find the area that fits best with your investment needs.
Possessing the ability to find the right real estate is one of the most important parts of this entire process. Throughout this time period, you must present yourself with the utmost level of calmness and diligence when conducting your real estate search. The action of dealing with auctions, wholesalers, and REO properties can be very difficult if you don’t have an experienced real estate agent like Leona guiding you through the process. REO properties define the type of real estate owned by the bank. The banks usually take control and seize the homes that can’t be auctioned. Once the bank takes full control of the property, their main goal is to sell the property as quickly as possible in order to get the money back they originally loaned to the previous owner who couldn’t stay current on their payments. Quick sales completed by the owner usually happen when the family moves to a different city/stage, an unfortunate divorce occurs, there is a sudden death in the family, or the owner needs to get rid of the home due to personal financial circumstances. All of these options can end up being great opportunities for willing investors.
Leona Estates takes our task as a professional real estate service very seriously. We select a property for the investor that is not only priced below the market value, but also contains a sufficiently wide margin to completely cover any potential costs that arise throughout the process. These can include two rounds of closing costs and renovation costs as well. As a new investor, the best mindset you can have going into this process is one with a high level of patience. The search for the best deals is a complex numbers game that requires answering thousands of letters, making hundreds of calls, looking at over one hundred properties and making about twenty to thirty offers of them when the search is mostly complete. All of this will ultimately lead to the purchase of the perfect investment for your current stage of life. As the condition of the house declines, the overall price you will have to pay decreases as well. This provides you with the best opportunity to flip the house into a property ready for sale.
During the process of buying and closing the deal, the Office of Leona Estates starts forming a team that is able to complete all the necessary tasks. Based on the issues discovered during the initial property inspection, Leona will also draw up a list of works to be completed. After you have approved this detailed list of worksheets, estimates, team personnel, and deadlines, the official house flipping process can begin.
Every single property has its own individual complexities which requires a different level of work based on the real estate in question. Depending on the volume and overall complexity of the repair that must occur for the property to sustain livable conditions, Leona will help you put together the best workers for the job. For large-scale projects, the house renovations can only begin once a licensed general contractor obtains every legal permit from the municipal construction department. Once this is complete, the renovations can begin.
When a new investor wants to start a House Flipping business, the Office of Leona Estates is here to provide all the real estate assistance they need. Leona goes to the Multiple Listing Service (MLS) to search the market prices as well as the public auction, sale by owner, and other professional platforms. This can be a long and extensive process that many investors don’t want to deal with so they end up making a huge mistake. Over burdened by the frustration that comes along with a lack of inventory and significant competition for properties on the market, the investor will just purchase anything hoping the numbers will settle in the future. Even if the market is growing, this careless method is going to cause you to buy a property that is way overpriced considering you also need money to complete the necessary renovations that will entice someone else to purchase the home. The “70 Percent Rule” should always be used here to calculate the risk versus the reward.
Before making the significant investments needed to start your House Flipping business, you must first analyze your own financial situation to ensure you have the necessary funds to both purchase the initial property and then pay for renovation expenses on the tail end. There are always unplanned problems that you must have extra funds to take care of due to the additional costs that will arise.
For example, say you’ve already purchased the property and began work on the needed renovations. You begin repairing the floor and find a new problem, corroded pipes that need to be partially replaced. This could also emerge in the form of a cracked foundation, damaged electricity, a termite infestation, the appearance of dangerous mold, etc. There is no way to be completely certain about what additional costs may arise so you should also have a cash fund on reserve. Experiencing a severe lack of funds in the middle of a large project like this can lead to a terrible situation and an extreme loss of money for you as the investor. An urgent sale is never ideal.
Working with professional builders who have experience working with all the renovations you need is extremely important to your success in flipping the house. Paying for the right job to be completed the first time will help you save a lot of time and money.
Many new investors severely underestimate how much time and effort it’s really going to take to complete the full renovation process. Even after a lot of planning is completed to estimate a reasonable time for the project to be complete, the project deadline must be extended in most situations. Property renovations require a lot of time and complex solutions on the end of the investor who is spearheading the project. Additional work causes more delays which also may result in new permits and required approvals to continue. Investors should also plan for the need to add additional time onto the original completion date of about one to three months.