70 Percent ARV: Why Can’t I Get More for My Real Estate Deal?
The real reason your fix and flip lender won’t give you more than 70% ARV…
One thing new investors ask all the time:
Why do lenders only lend 70 or 75%?
Let’s go over the numbers and see how lenders come up with that 70% number.
What Is ARV and the 70% Rule?
The number we’re talking about is what percentage of the after-repair value (ARV) a lender will give you.
The ARV is what you can sell a property for after flipping, or what it can be appraised for on a refinance for a BRRRR rental.
Here’s an example of what a 70% ARV might look like:
You buy a property. The market shows it will sell for $200k after it’s fixed up. If your lender offers 70% of the ARV, that’s the maximum amount your loan could be. In this case, 70% of $200k is $140k. So you can get up to $140,000 as a loan when you buy this property.
So that’s $60k worth of value that’s not being covered. This is where investors ask the question… There’s still a lot of money here. Why can’t I borrow against that extra $60,000?
Let’s dive into why lenders stop at 70%.
Why Do Lenders Stop at 70% ARV?
If lenders stop at 70% of the ARV, what happens to the remaining 30%?
First, is profit for you. Why do you invest in real estate? Because you want to make a profit. And if you don’t factor in profit at the beginning of your deal, there’s not going to be any leftover for you.
So as lenders, we build in a 10-15% profit margin for you. Let’s say on average, it’s 12.5%. That amount comes from the 30% of the ARV not covered by your loan.
In our example $200k property from earlier, 12.5% is $25,000, which will be profit for you at the end of the project.
There are a few other people involved in this process, especially on the selling side.
When you bring in a realtor, you can expect to say anywhere between 4.8% and 6%. To keep it easy, we usually estimate 5%.
So of your ARV, we’ve already taken up 17.5% between your profit and your realtor.
Closing Costs, Cost of Funds, and More with a 70% ARV
Closing costs vary, but it’s safe to assume they will cost 1.5%.
With all the costs so far, we could be looking at anywhere between 17% and 22%, but an average of 19% total.
After you’ve purchased the property and started fixing it up, there will be more costs. Two major areas that should be factored into your budget are interest on your loan and a general overage budget.
Between these extra costs, we’re sitting at an average of 29%…
Which is exactly why lenders leave 30% of the ARV off of the loan they give you.
Making Sense of a 70% ARV
With real estate investing, the money’s in the money. Understanding and feeling comfortable with the numbers is the fastest way to start getting into great deals.
You don’t want to get into a deal that won’t be profitable for you. If you won’t get at least 10-15% profit, why do it? Your lender should leave space for your profit and other costs that come up.
Have questions or a deal where you need help with the numbers? Contact us at Info@HardMoneyMike.com, and we’d love to see how we can help.
You can also get more resources about real estate investing on our YouTube channel.
Leave a ReplyWant to join the discussion?
Feel free to contribute!