What is the 70% Rule in House Flipping?

The 70% rule is a quick calculation that real estate investors use to determine the maximum price they should pay for an investment property. The rule states that an investor should pay no more than 70% of the After Repair Value (ARV) of a property, minus the cost of repairs needed.

The remaining 30% accounts for your profit margin (typically 10-15%), holding costs (2-5%), closing costs on purchase and sale (6-10%), and a buffer for unexpected expenses.

This formula has been used by house flippers for decades because it provides a quick way to evaluate deals and ensures you are buying with enough margin to make a profit even if things do not go exactly as planned.

How to Calculate the 70% Rule: Step-by-Step

Let us walk through a real example to show how the 70% rule works in practice.

Step 1: Determine the After Repair Value (ARV)

The ARV is what your property will be worth after all repairs and renovations are complete. To find this number, you need to analyze comparable sales (comps) in the area. Look for properties that:

• Sold within the last 3-6 months
• Are within 0.5-1 mile of your subject property
• Have similar square footage (within 200 sq ft)
• Have similar bedroom and bathroom counts
• Are in similar condition to what your property will be after rehab

For this example, let us say you find three comparable properties that sold for $290,000, $305,000, and $295,000. Your estimated ARV would be approximately $300,000.

Step 2: Estimate Your Repair Costs

Walk through the property (or review photos and inspection reports) to estimate all necessary repairs. Common categories include:

• Kitchen renovation: $15,000 - $40,000
• Bathroom updates: $5,000 - $20,000 per bathroom
• Flooring: $3 - $8 per square foot
• Paint (interior/exterior): $1 - $3 per square foot
• Roof replacement: $8,000 - $15,000
• HVAC: $5,000 - $12,000
• Electrical updates: $3,000 - $8,000
• Plumbing: $3,000 - $10,000

For this example, let us estimate $50,000 in total repair costs.

Step 3: Apply the 70% Rule Formula

Now we can calculate the Maximum Allowable Offer:

This means you should offer no more than $160,000 for this property. If the seller wants more, you either need to negotiate or walk away from the deal.

Why 70%? Breaking Down the Numbers

The 70% figure is not arbitrary. Here is how the remaining 30% typically breaks down:

• Profit margin: 10-15% - This is your payday for taking the risk and doing the work
• Buying closing costs: 2-3% - Title insurance, attorney fees, recording fees
• Selling closing costs: 6-8% - Real estate agent commissions, transfer taxes, title insurance
• Holding costs: 2-5% - Loan interest, property taxes, insurance, utilities during the project
• Contingency buffer: 2-5% - Unexpected repairs, market changes, extended timeline

When you add these up, you can see why flippers need that 30% cushion to make deals work profitably.

When to Adjust the 70% Rule

The 70% rule is a guideline, not a law. Experienced investors adjust the percentage based on market conditions and deal specifics.

Use 65% (More Conservative) When:

• You are new to flipping and still learning
• The property needs major structural work
• The market is slow or declining
• The property has been sitting on market for a long time
• You are uncertain about your repair estimates
• The property is in a less desirable location

Use 75-80% (More Aggressive) When:

• You have extensive experience and a reliable contractor team
• The market is hot with quick sales
• The property only needs cosmetic updates
• You already have a buyer lined up
• You are doing the work yourself (saving labor costs)
• The property is in a highly desirable neighborhood

Common Mistakes When Using the 70% Rule

Mistake 1: Overestimating ARV

This is the number one reason flips fail. Investors get emotionally attached to a deal and convince themselves the property will sell for more than it realistically will. Always use conservative comp values and verify with multiple sources.

Mistake 2: Underestimating Repairs

Renovation projects almost always cost more than expected. Always add a 10-20% contingency to your repair estimate. Hidden problems like mold, termites, foundation issues, or outdated electrical can blow your budget.

Mistake 3: Ignoring Holding Costs

Every month your flip takes longer than expected costs you money in loan interest, taxes, insurance, and utilities. A 6-month project with a hard money loan at 12% interest on a $200,000 loan costs $12,000 in interest alone.

Mistake 4: Not Accounting for All Closing Costs

Remember you pay closing costs twice - once when you buy and once when you sell. Do not forget agent commissions (typically 5-6% of sale price), which come directly out of your profit.

70% Rule Calculator: Try Different Scenarios

Want to run the numbers on your own deal? Use our free calculator to instantly calculate your Maximum Allowable Offer and see detailed profit projections.