The 70% Rule for Flipping Houses, With Examples

The formula

\text{ARV}\text{ARV}

After repair value: what the renovated house should sell for, from comparable sales

\text{rehab}\text{rehab}

The full renovation budget, with a contingency

With an ARV of $340,000 and a $50,000 rehab, the maximum allowable offer is 0.70 × $340,000 − $50,000 = $188,000.00. Offer that or less and the deal passes the screen; offer more and the margin is thinner than the rule assumes.

The 70% rule isn't a law or a lender requirement. It is a convention among house flippers, and some use a different percentage. Its value is speed: two numbers give you a ceiling before you spend time on a full analysis.

What the 30% has to pay for

The 30% of ARV the rule holds back isn't profit. It has to cover:

• buying costs at closing;
• the loan's points, fees and interest during the rehab and the sale;
• taxes, insurance and utilities while you own the house;
• agent commissions and closing costs when you sell;
• and only then, your profit, plus a cushion for surprises.

Financing the $340,000 example with a hard money loan at 11% and 2 points, held for six months, those costs come to $51,437.50, leaving $50,562.50 of profit, or 14.9% of the ARV. The rule worked as intended here.

Testing the 70% rule for flipping houses on three deals

Here are three flips, each bought at exactly the 70% rule's maximum allowable offer and financed and held the same way:

Some costs are proportional to price, such as commissions and points, and some are fixed, such as lender fees and monthly holding costs. Fixed costs take a larger share of a cheap house, so the same 30% leaves a smaller margin at the low end, while percentage-based costs scale with the price. Run your own deal through the hard money loan calculator, which shows the maximum allowable offer at any percentage you choose next to the full profit and ROI.

When the rule misleads

• A soft ARV. The rule is only as good as the ARV. If the comparable sales don't support it, the offer is too high from the start; a 10% lower ARV cuts both the sale price and, with hard money, often the loan.
• A rehab without contingency. Underestimating the repairs raises the true cost of the deal dollar for dollar.
• A long hold. Every month adds interest and holding costs. A project that takes twice as long uses up much more of the 30%.
• Tax. The rule ignores income tax. Houses held mainly for sale to customers in a business are not capital assets, so the profit on a flip is ordinary income, not a capital gain at lower rates.

Treat the rule as the first filter, and the full calculation, with your real financing terms and a stress test of the ARV, rehab and timeline, as the answer.

The rule and hard money loans

Hard money lenders typically lend the smaller of a percentage of total cost (purchase plus rehab) and a percentage of the ARV, and they release the rehab money in draws as work is done. Buying at or below the 70% rule's offer keeps the cost low relative to the ARV, which makes both limits easier to meet and reduces the cash you need at closing. The hard money loan calculator works out the loan, the draws, the interest and the cash to close for your deal, and how much the result changes if the sale takes longer or the ARV comes in lower.

Choosing a different percentage

Nothing makes 70% the right number for every deal. A flipper with cheaper financing or a faster turnaround may accept a higher percentage; one taking on a big renovation or an uncertain ARV may want a lower one. Here is the $340,000 example at three offer rules, with the profit the full calculation shows if you pay exactly the maximum allowable offer:

Each point of the rule moves the offer by 1% of the ARV, and the profit moves by about the same amount less the financing on it. Decide on your minimum profit first, then work back to the offer, rather than the other way round.

Getting the two inputs right

The ARV. Base it on recent sales of renovated homes nearby that are similar in size, age and features to what the house will be after the work, not on list prices or the best sale on the street. If the comparable sales disagree, use the lower end. A lender's appraisal will set its own figure, and the loan depends on it.

The rehab budget. Price it from contractor bids or a detailed scope, add permits, and include a contingency for what you find once walls are open. The 70% rule assumes the budget is right; every dollar of overrun comes straight out of the 30%.

Wholesalers and the 70% rule

Wholesalers, who put a distressed house under contract and assign the contract to a rehabber for a fee, use the same rule from the other side. The rehabber who buys the contract will judge the deal by its ARV, its rehab budget and the 70% rule, so the contract price plus the assignment fee has to land at or below the maximum allowable offer for the deal to sell. Working out the buyer's numbers first shows how much room there is for the fee.

Whichever side of the deal you are on, write down the ARV, the rehab budget and the comparable sales behind them. When the numbers are challenged, by a lender, a partner or a buyer, the rule is only as convincing as its inputs.