The 70% Rule: Why Experienced Flippers Use 65% Instead

The standard 70% rule for house flipping:

Max Offer = ARV x 70% - Rehab Cost

Where:

ARV   = After Repair Value (post-renovation market value)
Rehab = Total renovation cost including materials and labor
Max   = Maximum purchase price to maintain acceptable profit margin

The math behind 70%

ARV breakdown:
  Purchase price:        <= 70% of ARV
  Remaining 30% covers:
    Closing costs (buy):   3% of purchase
    Closing costs (sell):  6% of ARV
    Holding costs:         $1,200-$2,500/mo x months
    Hard money interest:   $1,000-$1,500/mo x months
    Taxes:                 30-50% of profit (dealers)
    Profit:                remainder

Example at 70%

ARV:                    $200,000
Rehab:                  $35,000
Max Offer (70% rule):   $200,000 x 0.70 - $35,000 = $105,000

Profit analysis if purchased at $105,000:
  Sale price:            $200,000
  - Purchase:            $105,000
  - Rehab:               $35,000
  - Buy closing (3%):    $3,150
  - Sell closing (6%):   $12,000
  - Holding (4 mo):      $6,000
  - HM interest (4 mo):  $4,200
  Pre-tax profit:        $34,650
  - Taxes (~38%):        $13,167
  Net profit:            $21,483

Why experienced flippers use 65%

At 65%:
  Max Offer = $200,000 x 0.65 - $35,000 = $95,000

  Pre-tax profit:        $44,650 (+$10,000 vs 70%)
  Net profit:            $27,683 (+$6,200 vs 70%)

The 5% difference ($10,000 lower purchase) creates $6,200 more after-tax profit. More importantly, it creates cushion for the three things that always go wrong:

Common overruns:
  Rehab budget +20%:     $7,000 extra cost
  Timeline +2 months:    $3,400 extra holding
  ARV comes in 5% low:   $10,000 less revenue

Total potential downside: $20,400

At 70% rule: $21,483 profit - $20,400 overrun = $1,083 (barely break even)
At 65% rule: $27,683 profit - $20,400 overrun = $7,283 (still profitable)

The 65% rule does not make you more money in a perfect scenario. It prevents you from losing money when things go wrong.

When to break the 70% rule

Only break it when:
  1. You are the contractor (save 30-40% on labor)
  2. The property is in a market with >5% annual appreciation
  3. You plan to hold as a rental if the flip fails
  4. The rehab is purely cosmetic (paint + carpet, <$10K)

Never break it when:
  1. You are using hard money (holding costs compound)
  2. The rehab is structural (foundation, roof, plumbing)
  3. You are new to flipping (first 3 deals, use 65%)
  4. The market is softening (days on market increasing)