Modifying 70% flippers rule for when you also plan to live there
Modifying 70% flippers rule for when you also plan to live there
Hi all,
I've got a question. If one is considering buying a house that needs work, but plans to live in it while fixing it up- what modifications (if any) to the 70% rule for flippers?
I'm speaking just from a financial perspective. One example is that you won't be planning on paying a realtors fee as a seller, so presumably the 70% rule could become the ~70+2% rule or so.
I also suppose that since the house is providing you living space, there probably is some additional relaxing to the 70% rule that can be used because you don't have that "carrying cost".
What am I not thinking through?
-b4xt3r
I've got a question. If one is considering buying a house that needs work, but plans to live in it while fixing it up- what modifications (if any) to the 70% rule for flippers?
I'm speaking just from a financial perspective. One example is that you won't be planning on paying a realtors fee as a seller, so presumably the 70% rule could become the ~70+2% rule or so.
I also suppose that since the house is providing you living space, there probably is some additional relaxing to the 70% rule that can be used because you don't have that "carrying cost".
What am I not thinking through?
-b4xt3r
- Sandtrap
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Re: Modifying 70% flippers rule for when you also plan to live there
One suggestion.
Drop the 70% rule.
Treat every flipper, every business investment, etc, on its own merits.
Do a business plan. Include everything you have to work with, etc.
Do a financial plan.
Do a project management projection.
Have an exit plan.
For example: if you have 7 pizza franchises across the city. Operate each one profitably on a case by case basis.
Business is finance is investing.
R/E, including “flippers”, is a business.
There’s a lot of pitfalls in a formulaic approach to investing .
j
Drop the 70% rule.
Treat every flipper, every business investment, etc, on its own merits.
Do a business plan. Include everything you have to work with, etc.
Do a financial plan.
Do a project management projection.
Have an exit plan.
For example: if you have 7 pizza franchises across the city. Operate each one profitably on a case by case basis.
Business is finance is investing.
R/E, including “flippers”, is a business.
There’s a lot of pitfalls in a formulaic approach to investing .
j
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Re: Modifying 70% flippers rule for when you also plan to live there
If you have a particular property in mind, it may be the case that you attempting to talk yourself into making a particular investment opportunity look better than it really is. Another option could be to keep searching for better opportunities until you stumble across a situation where there's more potential and less risk to make a good profit.
Sandtrap makes a fair point that a 70% rule is formulaic and that you need to make a plan considering the details of each situation. I am not in the business of house-flipping, but I would argue that a 70% rule might be a decent way to quickly winnow down a list of 1,000 possible house-flipping opportunities to a shortlist of 10 or 100 or so that appear to have the most potential for profit. Then you could investigate that shortlist in detail as Sandtrap suggests, and try to more accurately estimate profitability and risks of each project.
Being concerned about 2% here or there when evaluating a "70% rule" might also mean that you're operating with a false sense of accuracy. Real estate prices are not in your control, and if prices drop by 10% between when you buy and when you go to sell, that'll turn a situation where you thought you paid 70% of after-repair-value minus costs to one where you actually paid 80%. Similarly, if you underestimate the actual cost of the repair project or the impact your repairs will have on after-repair market value, that'll make more than a 2% difference.
Sandtrap makes a fair point that a 70% rule is formulaic and that you need to make a plan considering the details of each situation. I am not in the business of house-flipping, but I would argue that a 70% rule might be a decent way to quickly winnow down a list of 1,000 possible house-flipping opportunities to a shortlist of 10 or 100 or so that appear to have the most potential for profit. Then you could investigate that shortlist in detail as Sandtrap suggests, and try to more accurately estimate profitability and risks of each project.
Being concerned about 2% here or there when evaluating a "70% rule" might also mean that you're operating with a false sense of accuracy. Real estate prices are not in your control, and if prices drop by 10% between when you buy and when you go to sell, that'll turn a situation where you thought you paid 70% of after-repair-value minus costs to one where you actually paid 80%. Similarly, if you underestimate the actual cost of the repair project or the impact your repairs will have on after-repair market value, that'll make more than a 2% difference.
Re: Modifying 70% flippers rule for when you also plan to live there
Yeah, I was looking at some properties which penciled out to low 90% using the same math. Not sure there is enough profit there to take the risk of us not catching something.
Re: Modifying 70% flippers rule for when you also plan to live there
OP,
In general, if I have to rationalize my decision, it is a BAD IDEA. It is an alarm bell to try to wake me up that I am about to make a very bad decision.
So, please learn to read your own intuition and emotion. It is a very powerful way for your greater mind to tell you something that you refuse to listen so far.
KlangFool
In general, if I have to rationalize my decision, it is a BAD IDEA. It is an alarm bell to try to wake me up that I am about to make a very bad decision.
So, please learn to read your own intuition and emotion. It is a very powerful way for your greater mind to tell you something that you refuse to listen so far.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Modifying 70% flippers rule for when you also plan to live there
I don't know if you all have seen the news stories about the vandalized house in Colorado going on the market and getting multiple cash offers above the listing price in spite of its condition, but I think it says, in the current market anyway, the "70% flipper's rule" is unlikely to win you the house.
See story: https://www.fox21news.com/top-stories/l ... n-dollars/
And note that in the Redfin listing, it's had over 800k views (that must be a record): https://www.redfin.com/CO/Colorado-Spri ... e/34515765
See story: https://www.fox21news.com/top-stories/l ... n-dollars/
And note that in the Redfin listing, it's had over 800k views (that must be a record): https://www.redfin.com/CO/Colorado-Spri ... e/34515765
Re: Modifying 70% flippers rule for when you also plan to live there
So, there's a difference between rationalizing and understanding the investment. I'm trying to do the latter.KlangFool wrote: ↑Sun Jun 20, 2021 9:47 am OP,
In general, if I have to rationalize my decision, it is a BAD IDEA. It is an alarm bell to try to wake me up that I am about to make a very bad decision.
So, please learn to read your own intuition and emotion. It is a very powerful way for your greater mind to tell you something that you refuse to listen so far.
KlangFool
Re: Modifying 70% flippers rule for when you also plan to live there
70% flippers rule uses after repair value, which would be the current value. Seems to be robust against hot markets.oyster99 wrote: ↑Sun Jun 20, 2021 10:39 am I don't know if you all have seen the news stories about the vandalized house in Colorado going on the market and getting multiple cash offers above the listing price in spite of its condition, but I think it says, in the current market anyway, the "70% flipper's rule" is unlikely to win you the house.
See story: https://www.fox21news.com/top-stories/l ... n-dollars/
And note that in the Redfin listing, it's had over 800k views (that must be a record): https://www.redfin.com/CO/Colorado-Spri ... e/34515765
Re: Modifying 70% flippers rule for when you also plan to live there
I agree that formulas are starting points and aren't substitutes for due diligence. Doesn't 70% rule builds in some buffer for things to go wrong, unforseen problems, or market fluctuations down and still come out without losing too much $$. Doesn't that seem reasonable?Sandtrap wrote: ↑Sat Jun 19, 2021 7:20 pm One suggestion.
Drop the 70% rule.
Treat every flipper, every business investment, etc, on its own merits.
Do a business plan. Include everything you have to work with, etc.
Do a financial plan.
Do a project management projection.
Have an exit plan.
For example: if you have 7 pizza franchises across the city. Operate each one profitably on a case by case basis.
Business is finance is investing.
R/E, including “flippers”, is a business.
There’s a lot of pitfalls in a formulaic approach to investing .
j
That said, let's discuss a 400k ARV -- no realtors fee on the way out has ~8k of value, no cost of living elsewhere during 6 months of reno has maybe 12k of value, and also not extra paying of tax and utilities has maybe 5k of value. All just guesstimates. So compared to a flipper with just profit motive, maybe you'de net the same profit with using ~80% rule? That would still give a little buffer for something to go wrong.
Re: Modifying 70% flippers rule for when you also plan to live there
B4Xt3r,B4Xt3r wrote: ↑Sun Jun 20, 2021 2:34 pmSo, there's a difference between rationalizing and understanding the investment. I'm trying to do the latter.KlangFool wrote: ↑Sun Jun 20, 2021 9:47 am OP,
In general, if I have to rationalize my decision, it is a BAD IDEA. It is an alarm bell to try to wake me up that I am about to make a very bad decision.
So, please learn to read your own intuition and emotion. It is a very powerful way for your greater mind to tell you something that you refuse to listen so far.
KlangFool
Is that true? You have a rule. Now, you are trying to rationalize breaking your own rule. The correct path should be asking why your rule exist in the first place.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Modifying 70% flippers rule for when you also plan to live there
Respectfully, let’s agree to disagree on this one.KlangFool wrote: ↑Sun Jun 20, 2021 2:57 pmB4Xt3r,B4Xt3r wrote: ↑Sun Jun 20, 2021 2:34 pmSo, there's a difference between rationalizing and understanding the investment. I'm trying to do the latter.KlangFool wrote: ↑Sun Jun 20, 2021 9:47 am OP,
In general, if I have to rationalize my decision, it is a BAD IDEA. It is an alarm bell to try to wake me up that I am about to make a very bad decision.
So, please learn to read your own intuition and emotion. It is a very powerful way for your greater mind to tell you something that you refuse to listen so far.
KlangFool
Is that true? You have a rule. Now, you are trying to rationalize breaking your own rule. The correct path should be asking why your rule exist in the first place.
KlangFool
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Re: Modifying 70% flippers rule for when you also plan to live there
Not pricing the cost of repairs correctly.pseudoiterative wrote: ↑Sun Jun 20, 2021 6:25 pmOut of curiosity, what do you mean by "risk of us not catching something" ?
- Sandtrap
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Re: Modifying 70% flippers rule for when you also plan to live there
Whether portfolio investing or other investment:B4Xt3r wrote: ↑Sun Jun 20, 2021 2:41 pmI agree that formulas are starting points and aren't substitutes for due diligence. Doesn't 70% rule builds in some buffer for things to go wrong, unforseen problems, or market fluctuations down and still come out without losing too much $$. Doesn't that seem reasonable?Sandtrap wrote: ↑Sat Jun 19, 2021 7:20 pm One suggestion.
Drop the 70% rule.
Treat every flipper, every business investment, etc, on its own merits.
Do a business plan. Include everything you have to work with, etc.
Do a financial plan.
Do a project management projection.
Have an exit plan.
For example: if you have 7 pizza franchises across the city. Operate each one profitably on a case by case basis.
Business is finance is investing.
R/E, including “flippers”, is a business.
There’s a lot of pitfalls in a formulaic approach to investing .
j
That said, let's discuss a 400k ARV -- no realtors fee on the way out has ~8k of value, no cost of living elsewhere during 6 months of reno has maybe 12k of value, and also not extra paying of tax and utilities has maybe 5k of value. All just guesstimates. So compared to a flipper with just profit motive, maybe you'de net the same profit with using ~80% rule? That would still give a little buffer for something to go wrong.
Suggest doing a business/ financial plan and projection for each investment with no “rules”.
Why?
“Rules” are artificial constructs that can be interpreted in outcome. IE: number play.
IE: When doing a R/E “flipper” do the estimates down to the cost and amount of nails and how much it costs to drive them. Work with knowns vs estimates and rules.
Count every dollar in and out.
j
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Re: Modifying 70% flippers rule for when you also plan to live there
bit of a tangent:
It's easier to more accurately estimate things similar to things that you've successfully done before, provided you break down the work into fine detail tasks & dependencies, and the new situation is similar enough to what you've had experience of.
In my professional life I work on software projects. In some companies, software projects are launched based on very bad (optimistic) schedules where no one involved in producing the estimate even understands what the actual tasks to be done are at any detailed level, let alone tried to individually estimate cost & time required to complete those tasks. It's very easy to underestimate the cost and time of complex details that you're completely ignorant of, and this can produce projects that actually cost 10x as much to deliver as what people hoped when the project was started. That said, a project that ends up costing 10x more than the initial (bad) estimate could still be a commercial success provided the value of delivering that project is still much higher than the actual cost.
For software projects we'd probably want something more conservative than a "70% rule" -- i don't even think a "7% rule" would be conservative enough since the uncertainty is all in the build / "repair" cost, not in the cost to acquire the initial asset (there usually isn't one).