The 70% rule in house flipping: formula, worked example and limits

The 70% rule formula

Maximum allowable offer (MAO) = ARV × 70% − repair costs

Mind the order: take 70% of the ARV first, then subtract the rehab. Taking 70% of (ARV − rehab) gives a higher number, $190,400 here, and overpays by $14,400. In Excel: =B2*B4-B3, with the percentage in its own cell so you can change it.

The ARV is what the house will sell for once renovated, estimated from recent sales of comparable renovated homes nearby, not from the seller's asking price or an online estimate. The repair costs should be a line-item budget from a walk-through, ideally with a contractor, plus a contingency for what you find behind the walls.

What the 30% has to cover

The 30% gap is not profit. It is a budget for every cost other than the purchase and the rehab, and the profit is what is left. In the example, buying at $176,000:

• Selling costs, agent commission and seller closing costs at 8% of the ARV: $25,600.
• Holding costs for five months of property tax, insurance and utilities: $7,250.
• Financing, the points, fees and interest of a hard-money loan: $9,800.
• The buyer's closing costs at 2% of the price: $3,520.

Together that is 14.4% of the ARV, which leaves 15.6%, $49,830, as profit. That rough half-and-half split between costs and profit is why the rule works for typical mid-priced flips.

Worked example: maximum offer for a $320,000 ARV flip

Yellow cells are inputs. Rows 2 to 5 are the 70% rule, rows 7 to 18 the refined offer and rows 20 to 25 check what is left if you buy at the 70% price.

Worked example: maximum offer for a $320,000 ARV flip

	A	B	Formula in B
1	Item	Value
2	After-repair value (ARV)	320,000
3	Rehab budget	48,000
4	Rule percentage	70%
5	Maximum offer with the 70% rule	176,000	=B2*B4-B3
6
7	Refined maximum offer from the deal's own costs
8	Selling costs (% of ARV)	8.0%
9	Selling costs	25,600	=B2*B8
10	Holding months	5
11	Holding costs per month (tax, insurance, utilities)	1,450
12	Holding costs	7,250	=B10*B11
13	Financing costs (points, fees, interest)	9,800
14	Target profit	35,000
15	All costs except the purchase	125,650	=B3+B9+B12+B13+B14
16	Buyer's closing costs (% of price)	2.0%
17	Refined maximum offer	190,539	=(B2-B15)/(1+B16)
18	Rule percentage this deal implies	74.5%	=(B17+B3)/B2
19
20	Check: buy at the 70% rule price
21	Purchase price	176,000	=B5
22	Closing costs on the purchase	3,520	=B21*B16
23	Net profit	49,830	=B2-B21-B22-B3-B9-B12-B13
24	Net profit as % of ARV	15.6%	=B23/B2
25	Selling, holding, financing and closing as % of ARV	14.4%	=(B9+B12+B13+B22)/B2

Fictional property and illustrative costs. Real costs depend on the market, the lender and the property. Educational only, not investment advice.

A refined maximum offer from real costs

Once you have real numbers, work backwards from the ARV instead: subtract the selling costs, holding and financing costs, the rehab and the profit you want, here $125,650 in total. What is left, $194,350, has to pay for the purchase and the buyer's closing costs. Because those are a percentage of the price itself, divide at the end:

Refined MAO = (ARV − all costs except the purchase) ÷ (1 + closing cost %) = $190,539

That is about $14,500 more than the 70% rule allows, because this deal's costs are lower than the rule assumes and the target profit of $35,000 is modest. The implied percentage is (190,539 + 48,000) ÷ 320,000 = 74.5%. A refined offer is only as good as its inputs, so keep the 70% figure as the screening number and the refined one as the upper limit.

When the 70% rule fails

• Cheap houses. Many costs do not shrink with the price. On a $120,000 ARV, closing costs, insurance, permits and a minimum profit eat a much bigger share, so investors use 60–65%.
• Expensive markets. On a $900,000 ARV, 30% is $270,000, more than the costs and a fair profit need. Flippers often go to 75–80% there, or they would never win a deal.
• Long or uncertain projects. Each extra month adds holding and interest costs, and a delay of a few months can halve the profit. Model the timeline, as the break-even analysis guide does for a business.
• Big rehabs. The rule subtracts the rehab in full, but a large structural job also carries more risk. Add a contingency of 10–20% to the budget.

Is the 70% rule the same as the 1% rule?

No. The 70% rule is for flips: buy, renovate and sell. The 1% rule is a screen for buy-and-hold rentals, where the monthly rent should be at least 1% of the purchase price. For rentals the more useful measures are net operating income and the cap rate, because the return comes from the rent, not from the sale.

Common mistakes

• Taking 70% after subtracting the rehab. 70% × (ARV − rehab) overpays by 30% of the rehab budget. Multiply the ARV first, then subtract.
• Using the asking price or an online estimate as ARV. The ARV must come from recent sales of comparable, renovated homes nearby.
• An optimistic rehab budget. Every dollar of overrun comes straight off the profit. Get a line-item estimate and add a contingency.
• Treating the 30% as profit. Selling, holding, financing and closing costs often take half of it.
• Ignoring time. The rule has no timeline. Two extra months of interest and holding costs can turn a good deal into a weak one.
• Using one percentage everywhere. Cheap and expensive markets need different percentages, so check the deal with real costs.