What is the 70% rule in House Flipping in the UK?
House flipping is a lucrative investment strategy that has gained popularity in the UK over recent years. It’s a straightforward concept: buy a property, renovate it, and then sell it for a profit. However, the reality is more complex, requiring careful planning, a good understanding of the market, and a well-executed financial strategy. One of the most important financial guidelines in house flipping is the 70% rule.
This rule serves as a guideline to help investors determine the maximum price they should pay for a property to ensure profitability after renovations. But what exactly is the 70% rule, and how can it be applied effectively in the UK property market? Let’s dive in.
Understanding the 70% Rule
The 70% rule is a simple formula that helps investors calculate the maximum amount they should pay for a property, factoring in the cost of renovations. The rule states that you should pay no more than 70% of the After Refurbishment Value (ARV) of the property, minus the estimated cost of refurbishment.
The formula is as follows:
Maximum Purchase Price = (ARV x 70%) – Refurbishment Costs
After Refurbishment Value (ARV) refers to the estimated value of the property after all the renovations are completed. This figure is crucial as it determines how much you can sell the property for in the market.
For example, if a property’s ARV is estimated at £200,000, and the cost of refurbishments is £30,000, the 70% rule would advise you to pay no more than £110,000 for the property. Here’s the breakdown:
ARV: £200,000
70% of ARV: £140,000
Minus Refurbishment Costs: £30,000
Maximum Purchase Price: £110,000
This means if you buy the property for £110,000, invest £30,000 in refurbishments, and sell it for £200,000, you should make a decent profit, assuming all other costs (like transaction fees, taxes, and holding costs) are accounted for within your budget.
Why the 70% Rule Matters
In the competitive UK property market, the 70% rule acts as a safeguard against overpaying. It ensures that you leave enough room for profit after considering the various costs associated with buying, renovating, and selling the property. Following this rule can help you avoid common pitfalls like underestimating refurbishment costs or overestimating the final selling price.
Moreover, the rule forces discipline. It requires you to thoroughly research and estimate the ARV and refurbishment costs before making an offer. This level of due diligence is crucial for any successful property investor.
Applying the 70% Rule
While the 70% rule is a useful guideline, it’s important to remember that it’s not a one-size-fits-all approach. The UK property market is diverse, with significant variations in property values, demand, and costs depending on the location.
Regional Differences
In some parts of the UK, especially in high-demand areas like London and the South East, adhering strictly to the 70% rule might be challenging. Property prices in these areas are often higher, and competition is fierce, which can drive up the purchase price. In such cases, investors might need to adjust their expectations or look for properties in less saturated markets where the rule can be more easily applied.
Adjusting for Market Conditions
The UK housing market can fluctuate based on economic conditions, interest rates, and government policies. During a booming market, property values may increase rapidly, which could justify paying slightly more than the 70% rule suggests. Conversely, in a declining market, sticking to or even tightening the rule could be vital to avoid losses.
When to Break the Rule
While the 70% rule is a solid guideline, there are situations where breaking it might make sense. For example, if you find a property in a prime location where the potential for appreciation is high, or if the property has unique features that could command a higher selling price, you might justify paying more than 70% of the ARV.
However, this should be done with caution. Overestimating the ARV or underestimating refurbishment costs can quickly erode your profit margin. If you choose to deviate from the 70% rule, ensure you have a thorough understanding of the market and a solid backup plan.
How to Finance a House Flip
Securing financing is a crucial step in property flipping. Options include traditional mortgages, bridging loans, and private investors. Each has its pros and cons.
Financing Options:
Traditional Mortgages: Lower interest rates but not really a viable option due to stricter qualification requirements, longer processing times and most traditional mortgage lenders may not lend due to the amount of refurbishment that may be required and the short-term nature of the loan.
Bridging Loans: Bridging loans are the financing method of choice for many property developers and investors as they are easier and faster to obtain but come with a slightly higher interest rates due to their short-term nature which is generally between 3 and 24 months.
Private Investors: Flexible terms but require a compelling business plan.
Reach out and give us a call, at Evolve Finance we understand all the best financing options for your flip and can guide you through the intricacies of the process, helping you explore all available options.
Conclusion
The 70% rule is a valuable tool for UK property investors, offering a clear, straightforward way to calculate the maximum purchase price for a flip. It helps safeguard your investment by ensuring a healthy profit margin after all costs are considered. However, like any rule, it should be applied with flexibility and adjusted for market conditions, location, and individual project circumstances.
By combining the 70% rule with careful research, market knowledge, and strategic planning, you can increase your chances of success in the competitive world of UK house flipping. Happy flipping!