The simplified flip profit formula:
Profit = Sale Price - Purchase Price - Rehab Cost
This formula is wrong. It misses 8 cost categories that consume 40-60% of the gross margin.
The complete formula
Net Profit = Sale Price
- Purchase Price
- Rehab Cost
- Buy Closing Costs
- Sell Closing Costs
- Hard Money Interest
- Hard Money Points
- Insurance (hold period)
- Property Tax (hold period)
- Utilities (hold period)
- Federal Income Tax
- Self-Employment Tax
- State Income Tax
Worked example
Purchase: $120,000
Rehab: $35,000
Sale (ARV): $205,000
ACQUISITION COSTS
Buy closing (3%): $3,600
Hard money points: $2,400 (2 pts on $120K loan)
HOLDING COSTS (4 months)
HM interest (12%): $4,800 ($1,200/mo x 4)
Insurance: $600 ($150/mo x 4)
Property tax: $1,200 ($300/mo x 4)
Utilities: $800 ($200/mo x 4)
DISPOSITION COSTS
Agent commission: $10,250 (5% of $205K)
TOTAL COSTS: $23,650
PRE-TAX PROFIT
Gross: $205,000 - $120,000 - $35,000 = $50,000
After costs: $50,000 - $23,650 = $26,350
TAXES (flipper = dealer status)
Federal (22%): $5,797 (22% of $26,350)
Self-employment: $4,032 (15.3% of $26,350)
State (3%): $791 (3% of $26,350)
Total tax: $10,620
NET PROFIT: $26,350 - $10,620 = $15,730
The 70% rule as a sanity check
Max Offer = ARV x 70% - Rehab
Max Offer = $205,000 x 0.70 - $35,000
Max Offer = $143,500 - $35,000
Max Offer = $108,500
At $120,000 purchase, this deal exceeds the 70% rule by $11,500. That explains the thin margin.
If purchased at $108,500 (70% rule price):
Pre-tax profit: $205,000 - $108,500 - $35,000 - $23,650 = $37,850
After tax (~38%): $37,850 x 0.62 = $23,467
Net improvement: $23,467 - $15,730 = $7,737
The 70% rule exists specifically to create enough margin to absorb holding costs, closing costs, and taxes while leaving acceptable profit.
Cost sensitivity: what happens when rehab runs over
Rehab Budget Actual Cost Overrun Extra Holding Total Impact
$35,000 $35,000 $0 $0 baseline
$35,000 $40,000 $5,000 $1,200 (1 mo) -$6,200
$35,000 $45,000 $10,000 $2,400 (2 mo) -$12,400
$35,000 $50,000 $15,000 $3,600 (3 mo) -$18,600
A $15,000 rehab overrun does not cost $15,000. It costs $18,600 because each extra month of work adds $1,200 in hard money interest plus insurance, tax, and utilities. The rehab overrun multiplier is approximately 1.24x in this scenario.
What this calculation does not cover
It does not account for:
Permit fees and inspection delays
Utility connection/transfer fees
Dumpster and debris removal
Contractor no-shows and rework
Market price changes during hold
Buyer concessions at sale
Home warranty for buyer
1031 exchange (not available for dealers)
The line-by-line profit calculation is a planning estimate. Actual results depend on execution speed, contractor reliability, and market timing.
Top comments (1)
The dealer-status point at the end is the one that really bites. Flip profit is ordinary income plus self-employment tax, while the same property held as a rental gets Schedule E treatment, deductible expenses, and depreciation sheltering the cash flow. I have seen people run the "simple formula" on a deal, get excited about $50k gross, and not realize the tax structure alone can swing the net by five figures depending on which side of the flip-vs-hold line the IRS puts them on. The holding-cost breakdown is a good checklist too - insurance and utilities during the hold are the ones first-timers always forget to budget.