House flipping relies on quick math to separate promising deals from money pits. One of the most common shortcuts is the 70% rule. It helps investors estimate a maximum offer price without getting bogged down in every detail upfront. But like any rule of thumb, it has limits. Knowing when to apply it—and when to ignore it—can save you time, money, and stress.
This guide breaks down how the rule works, where it falls short, and what to focus on instead. No guarantees of profit. Not financial, legal, or tax advice.
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What the 70% Rule Actually Means
The 70% rule is a quick way to determine the highest price you should pay for a distressed property. The formula is simple: do not pay more than 70% of the After Repair Value (ARV), minus the estimated cost of repairs.
Formula:
Maximum Offer = (ARV × 0.70) – Repair Costs
Example:
A property you expect to sell for $300,000 after repairs needs $40,000 in work.
Maximum Offer = ($300,000 × 0.70) – $40,000 = $210,000 – $40,000 = $170,000
In this scenario, $170,000 is the most you would want to offer, assuming your numbers are accurate.
The rule is designed to leave room for profit, holding costs, and selling costs.
When the Rule Works Well
The 70% rule is most reliable in these situations:
- Distressed properties with clear scope. If the home needs obvious repairs—a new roof, updated kitchen, or repaired foundation—the rule gives you a quick floor price.
- Stable or rising ARV markets. In neighborhoods where comparable sales support your after-repair value, the 70% floor is more likely to hold.
- Cash or short-term financing. If you are not paying monthly mortgage interest, the carrying cost portion of the rule is less critical.
- Wholesale assignments. Wholesalers often use a stricter version (often 65% or 60%) because they need to assign the contract to another buyer and still leave room for that buyer’s profit.
In these cases, the rule acts as a sanity check. It keeps you from overpaying in a bidding war.
When the Rule Breaks Down
The 70% rule can mislead you in several common scenarios.
1. ARV is uncertain
The rule is only as good as your After Repair Value estimate. If you are buying in a neighborhood with few comps, or if the market is volatile, your ARV could be too high or too low. Overestimating ARV is the most common way flippers lose money on the 70% rule.
2. Repair costs are under-estimated
Beginners often see “cosmetic” needs but underestimate hidden work: mold, outdated electrical, plumbing reroutes, or permit-related upgrades. If your repair budget is off by $20,000, your maximum offer shifts significantly.
3. Markets with low margins
In some areas, the after-repair value does not support a 70% discount. You might need to offer 80% of ARV just to get a deal that cash-flows after all costs. In those markets, the rule becomes a ceiling, not a floor.
4. Long holding periods
If you expect to hold the property for six months or more, carrying costs eat into your margin. The standard 70% rule assumes a quicker turnover. If your timeline stretches, you may need to offer less upfront.
5. Permit and code requirements
Some renovations require permits, inspections, or bring the house up to current code. These costs can add thousands to your final bill and are not always visible at purchase. The rule does not account for these unless you build them into your repair estimate.
A Worked Example with Numbers
Let’s walk through a hypothetical deal.
Property data (hypothetical):
- Estimated After Repair Value (ARV): $250,000
- Estimated repair costs: $35,000
- Carrying costs (taxes, insurance, utilities): $3,000 per month
- Expected flip timeline: 4 months
Step 1: Apply the 70% rule.
Maximum Offer = ($250,000 × 0.70) – $35,000 = $175,000 – $35,000 = $140,000
Step 2: Subtract carrying costs.
If you hold for 4 months at $3,000/month, that is $12,000 in holding costs.
Adjusted maximum offer = $140,000 – $12,000 = $128,000
Step 3: Estimate profit.
If you sell at the $250,000 ARV, your gross profit before taxes and agent fees is:
$250,000 – $128,000 (purchase) – $35,000 (repairs) – $12,000 (holding) = $75,000
That is roughly 30% of the ARV. If your target profit is 20%, this deal hits the mark. If you need 40%, you may need to renegotiate the purchase price or reduce repair scope.
Step 4: What if the timeline extends?
If the property sits for 8 months instead of 4, holding costs double to $24,000.
Adjusted maximum offer = $140,000 – $24,000 = $116,000
Your profit drops to $51,000. The rule alone did not warn you about the timeline—you had to run the numbers yourself.
Risks and Common Mistakes
Over-relying on the percentage
The 70% rule is a starting point, not a destiny. Some flippers treat it as a hard limit and miss deals that work. Others treat it as a suggestion and overpay, thinking the rule will “adjust” later. It will not.
Ignoring the exit strategy
If you plan to rent the property after flipping, the 70% rule may not apply. Rental analysis uses different metrics: cash-on-cash return, cap rate, and monthly cash flow. The 70% rule is built for a quick sale.
Skipping the comps
If you do not have at least three solid comparable sales that support your ARV, the rule is guessing. Always verify the ARV before locking in your offer.
Forgetting selling costs
The rule leaves room for profit, but it does not automatically deduct real estate commissions, transfer taxes, or closing costs. Those typically run 8% to 10% of the sale price. If you do not subtract them, your “profit” may vanish at the closing table.
Permits and Local Rules
Before you buy, check what permits are required for your planned renovations. Some cities require permits for electrical, plumbing, or structural work. Failing to pull the right permits can result in fines, forced undoing of work, or problems when you sell.
Also, research local zoning and occupancy rules. If you are converting a garage or adding a bedroom, the final approved plans may differ from what you budgeted. Include a permit contingency in your repair estimate, or get cost estimates from a licensed contractor who knows the local requirements.
Taxes on Flip Profits
Profit from a flip is generally taxed as ordinary income, not long-term capital gains, unless you qualify for a special exception. The profit is calculated as:
Sale price – (purchase price + repair costs + holding costs + selling costs) = taxable profit
Set aside a portion of your expected profit for taxes. Many flippers set aside 25% to 30%, but your rate depends on your total income and local tax laws. Consult a tax professional before filing.
FAQ
Do you stick close to 70%, or adjust it based on the deal and market?
Most experienced flippers adjust. In a hot market where comps support a high ARV, some drop to 65% or 60% to ensure profit. In a slower market, they may move to 75% or 80% just to get the property under contract. The rule is a baseline, not a contract.
Are you planning to flip these yourself or just analyzing deals right now?
If you are analyzing deals for potential partners or wholesalers, the 70% rule is a quick filter. If you are flipping yourself, you will need to run the full numbers: repair estimates, carrying costs, exit timeline, and taxes.
How much is HARD money in my market?
Hard money loan rates and fees vary by lender, state, and credit profile. They are not included in the 70% rule calculation, but they affect your maximum offer. If you are paying 10%–15% interest monthly, your carrying costs are higher, and you may need to offer less upfront.
What are my actual carrying costs per month?
Carrying costs include property taxes, homeowner’s insurance, utilities, and loan interest (if financed). They can range from $1,000 to $5,000+ per month depending on the property price and location. Track your actual costs for your first few deals so you can adjust the rule for your market.
This guide is for educational purposes only. It does not constitute financial, legal, or tax advice. Always conduct your own due diligence and consult qualified professionals before making investment decisions. No guarantees of profit are expressed or implied.