The 70% Rule Explained (And When You Should Break It)
It is the most famous formula in real estate investing. The 70% Rule protects you from overpaying. Here is how it works, and why strict adherence isn't always the best strategy.
If you have spent more than ten minutes researching how to flip houses, you have heard of the 70% Rule. It is a quick back-of-the-napkin formula used to determine your Maximum Allowable Offer (MAO). The formula is simple:
For example, if a property has an After Repair Value (ARV) of $350,000 and needs $50,000 in repairs, your maximum offer would be: ($350,000 × 0.70) − $50,000 = $195,000. Need help calculating ARV? Check out our free ARV calculator.
Why 70%?
The 30% discount isn't purely profit. It is designed to act as a comprehensive buffer. That 30% must cover your holding costs (taxes, insurance, loan interest), your closing costs on both the buy and sell sides, realtor commissions, and finally, your expected profit margin (usually 10-15%). According to BiggerPockets, the 70% rule has been the gold standard for evaluating flip deals for decades.
Here's how that 30% typically breaks down:
- Holding costs (5-7%) — mortgage payments, insurance, utilities, property taxes during the rehab period
- Closing costs (3-5%) — title insurance, transfer taxes, attorney fees on both buy and sell sides
- Realtor commissions (5-6%) — the seller's agent commission when you sell the renovated property
- Profit margin (10-15%) — your actual return on the deal
- Buffer (2-5%) — contingency for unexpected repairs, delays, or market changes
When You Should Break the 70% Rule
While the 70% Rule is a great starting point for beginners, professional flippers know that it is not a rigid law. In highly competitive markets or high-price-point areas, sticking strictly to 70% means you will never win a bid.
1. High-Value Markets
In a market where the ARV is $1,000,000, a 30% margin is $300,000. Even after subtracting $50,000 in repairs and $80,000 in closing/holding costs, leaving $170,000 in profit is highly unrealistic in a competitive market. In these markets, investors often use an 80% or 85% rule, because a 10% profit margin on $1M ($100,000) is still an incredible return on time and equity.
2. The Lipstick Flip (Low Risk)
If a house only needs $10,000 in cosmetic updates (paint and carpet) and you can turn it around in 4 weeks, your risk and holding costs plummet. You can often push your offer to 75% or 80% and still walk away with a fast, safe profit. Use our free rehab cost estimator to price out cosmetic vs. full rehab scenarios.
3. Lower-Value Markets
Conversely, in a market where the ARV is $100,000, a 30% margin is $30,000. If repairs are $20,000, you are left with $10,000 to cover holding costs, commissions, and profit. You will lose money. In low-value markets, you might need to drop to a 60% or 65% rule to ensure sufficient absolute dollar profits.
Moving Beyond the Rule of Thumb
Rules of thumb generate quick estimates; they do not construct business plans. You should never write a non-refundable earnest money check based solely on the 70% Rule. You must itemize every single expense — hidden costs in fix-and-flip deals can eat your entire profit if you're not careful.
A proper deal analysis should include:
- Itemized rehab costs (not a guess — get contractor bids)
- Accurate holding cost projections based on your actual timeline
- Closing costs on both sides of the transaction
- Financing costs (hard money rates, points, origination fees)
- A 10-15% contingency buffer on top of everything
Enter your ARV and estimated repair costs to instantly calculate your Maximum Allowable Offer. Use the free calculator →
Stop guessing with rules of thumb. FlipLogic provides a highly detailed deal analyzer that calculates holding costs, closing costs, and exact profit margins based on your specific parameters. Start analyzing deals accurately.