What Is the 70% Rule?
The 70% rule is a quick formula used by fix and flip investors to determine the maximum price they should pay for a property. It states:
Maximum Purchase Price = (ARV x 70%) - Estimated Rehab Costs
ARV (After-Repair Value) is the estimated market value of the property after renovation is complete. The 30% margin that is "left on the table" covers your financing costs, holding costs, selling costs, and profit.
This rule has been used by house flippers for decades because it works. It is simple enough to calculate on the back of a napkin, yet conservative enough to protect your profit margin against the inevitable surprises that come with renovation projects.
The Formula in Action
Example 1: A Solid Deal - ARV: $300,000 - Rehab estimate: $50,000 - Maximum Purchase Price: ($300,000 x 0.70) - $50,000 = $160,000 - If you can buy the property for $160,000 or less, the deal passes the 70% test.
Example 2: A Tight Deal - ARV: $250,000 - Rehab estimate: $60,000 - Maximum Purchase Price: ($250,000 x 0.70) - $60,000 = $115,000 - The higher rehab cost relative to the ARV compresses your maximum purchase price. This deal requires a very low acquisition price to work.
Example 3: A Premium Market Deal - ARV: $500,000 - Rehab estimate: $80,000 - Maximum Purchase Price: ($500,000 x 0.70) - $80,000 = $270,000 - Higher-value properties offer more absolute dollar profit, even at the same percentage margin.
What the 30% Margin Covers
That 30% between your all-in cost and the ARV is not pure profit. Here is where it typically goes:
Financing Costs (4-6% of ARV): Origination points (1.5-3%), interest payments during the hold period, and closing costs on the purchase. On a $300,000 ARV property with a $200,000 loan at 11%, holding for 5 months: approximately $13,000-$18,000 in total financing costs.
Holding Costs (2-3% of ARV): Property taxes, insurance, utilities, and maintenance during renovation. On a $300,000 property, expect $500-$1,000/month for 4-6 months = $3,000-$6,000.
Selling Costs (6-8% of ARV): Real estate agent commissions (5-6%), seller concessions (0-2%), staging, photography, and closing costs. On a $300,000 sale: $18,000-$24,000.
Profit (15-18% of ARV): What remains is your net profit. On a $300,000 ARV deal that follows the 70% rule, expect $45,000-$54,000 in net profit. This number can vary significantly based on how efficiently you manage the project.
When to Bend the Rule
The 70% rule is a guideline, not a law. Experienced investors adjust the percentage based on market conditions and deal specifics.
Use 65% in uncertain markets. If your market is showing signs of cooling (rising inventory, longer days on market, price reductions increasing), a larger margin protects you against ARV decline during your hold period. An extra 5% margin on a $300,000 ARV is an additional $15,000 cushion.
Use 75% in hot markets with deep experience. In extremely competitive markets where deals at 70% barely exist, experienced investors (10+ flips) sometimes stretch to 75%. This reduces your profit margin but allows you to acquire deals in competitive environments. Only do this if you have reliable contractors, a proven process, and the financial reserves to absorb surprises.
Adjust for rehab scope. A light cosmetic rehab (paint, flooring, landscaping) has far less risk than a full gut renovation (new roof, foundation work, complete systems). A cosmetic flip with a $15,000 budget might work at 75-80% of ARV because the risk of cost overruns is minimal. A $100,000 gut renovation should use 65-70% because the potential for surprises is high.
The Most Important Number: ARV
The entire 70% rule depends on your ARV estimate being accurate. An inflated ARV produces a maximum purchase price that is too high — and your "profitable" deal becomes a money-loser when you sell.
How to estimate ARV accurately:
- Pull 3-5 comparable sales within a half-mile radius that sold in the last 6 months
- Comparables must be similar in size (square footage within 15%), bedroom/bathroom count, and condition (renovated)
- Exclude distressed sales, off-market transactions, and outliers
- Average the remaining comps — this is your conservative ARV estimate
- Have your real estate agent or appraiser validate your estimate independently
The golden rule of ARV estimation: If your profit depends on achieving the highest possible ARV, the deal is too tight. Use a conservative ARV and build your analysis around numbers you are confident about.
Common Mistakes with the 70% Rule
Mistake 1: Underestimating rehab costs. If your $40,000 rehab estimate becomes $55,000, your profit margin disappears. Always add a 15-20% contingency to your rehab budget before applying the 70% rule.
Mistake 2: Ignoring holding costs. The 70% margin assumes a certain hold time. If your 4-month project takes 7 months, the extra 3 months of interest, taxes, and insurance eat directly into your profit.
Mistake 3: Cherry-picking comps. It is tempting to use the one comparable sale that supports your desired ARV. Use the average of multiple comps, and weight the lower ones more heavily. Conservative ARV estimates protect your downside.
Mistake 4: Applying the rule without local context. In markets with high closing costs (New York, California), the 30% margin may not be enough. In markets with low costs and fast turnover, 75% may be safe. Adjust based on your specific market's cost structure.
Putting It All Together
The 70% rule gives you a fast, reliable way to screen deals. Run the formula on every potential acquisition before spending time on detailed analysis. If a deal does not pass the 70% test with conservative numbers, move on — there are always more deals.
When a deal does pass, move to a full spreadsheet analysis: itemize every cost (purchase, closing, rehab, contingency, financing, holding, selling), model the timeline, and stress-test the ARV. If the numbers still work, get pre-qualified with AIRE Lending, make your offer, and execute.