The Profit Number Everyone Gets Wrong
New flippers calculate profit like this:
Sale price - purchase price - rehab = profit
That misses 30-40% of real costs. Here is the actual formula:
True Profit = Sale Price - Purchase - Rehab - Holding Costs - Buying Closing Costs - Selling Closing Costs - Agent Commission
Real Numbers: Cleveland Flip
| Item | Amount |
|---|---|
| Purchase Price | $85,000 |
| Rehab | $35,000 |
| Holding Costs (5 months) | $8,200 |
| Purchase Closing Costs | $2,500 |
| Sale Price (ARV) | $165,000 |
| Agent Commission (5%) | $8,250 |
| Selling Closing Costs | $3,300 |
| True Profit | $22,750 |
| ROI | 18.6% |
The naive calculation ($165K - $85K - $35K = $45K profit) overestimates by 2x.
The 70% Rule as a Quick Screen
Max Offer = ARV × 70% - Rehab Costs
For this deal: $165,000 × 0.70 - $35,000 = $80,500 max offer
We paid $85,000 — above the 70% Rule threshold. The deal still worked but with thinner margins.
Hidden Costs That Kill Flip Profits
- Holding costs — hard money interest, taxes, insurance, utilities. $1,500-$2,500/month is typical.
- Agent commission — 5-6% of sale price. On a $200K flip, that is $10,000-$12,000.
- Permit and inspection fees — $500-$3,000 depending on scope.
- Contingency overruns — budget 15% above your rehab estimate.
Free Tools
- House Flipping Profit Calculator — models true profit with ALL costs
- ARV Calculator — estimate after-repair value from comps
- Rehab Cost Estimator — build an accurate renovation budget
- 70% Rule Calculator — quick max offer screening
If you are not calculating holding costs and commissions, you are not calculating profit — you are guessing.
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