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The 70% rule is the gold standard for fix-and-flip investors to quickly evaluate potential deals and maintain profitable margins. This time-tested formula helps investors determine the maximum amount they should pay for a property while ensuring adequate profit margins.
Whether you're a seasoned investor or just starting in fix-and-flip investing, understanding and properly applying the 70% rule is crucial for your success. This comprehensive guide will walk you through everything you need to know about this fundamental investment principle.
What is the 70% Rule?
The 70% rule is a quick calculation method used by real estate investors to determine the maximum amount they should pay for a property that they plan to fix and flip. The rule states that an investor should pay no more than 70% of the After Repair Value (ARV) minus the cost of necessary repairs.
70% Rule Formula
Where:
- ARV = After Repair Value (estimated value after renovations)
- 70% = The percentage that accounts for profit and holding costs
- Repair Costs = Estimated cost of all necessary renovations
Why 70%?
The 70% figure isn't arbitrary. It's designed to account for:
- Profit margin (15-20%): Your compensation for the work and risk
- Holding costs (2-3%): Interest, utilities, insurance during renovation
- Selling costs (7-10%): Real estate commissions, closing costs, marketing
- Contingency buffer (3-5%): Unexpected repairs or market changes
How to Calculate the 70% Rule
Calculating the 70% rule involves three main components. Let's break down each step:
Step 1: Determine the After Repair Value (ARV)
The ARV is the estimated market value of the property after all renovations are complete. To calculate ARV:
- Research recent comparable sales (comps) in the area
- Look for properties with similar size, age, and condition (post-renovation)
- Adjust for differences in square footage, lot size, and features
- Consider current market trends and conditions
Step 2: Estimate Repair Costs
Accurate repair cost estimation is crucial for the 70% rule to work effectively:
- Get detailed contractor quotes for major work
- Use per-square-foot estimates for standard renovations
- Factor in material costs and labor rates in your area
- Include permits and inspection fees
- Add a 10-20% contingency for unexpected issues
Step 3: Apply the Formula
Once you have your ARV and repair costs, simply plug them into the formula:
Example Calculation:
ARV: $300,000
Repair Costs: $40,000
Calculation: ($300,000 × 70%) - $40,000 = $210,000 - $40,000 = $170,000
Maximum Offer: $170,000
Step-by-Step Process for Evaluating a Deal
Step 1: Property Analysis
- Visit the property and assess its condition
- Take detailed photos and notes
- Identify all necessary repairs and improvements
- Check for structural issues or major system problems
Step 2: Market Research
- Find 3-5 comparable sales within the last 6 months
- Ensure comps are within 0.5 miles and similar size
- Adjust for differences in condition, features, and location
- Calculate average price per square foot
Step 3: Cost Estimation
- Get quotes from licensed contractors
- Research material costs at local suppliers
- Factor in permit costs and timeline
- Add contingency for unexpected issues
Step 4: Apply the 70% Rule
- Calculate ARV based on comparable sales
- Multiply ARV by 70%
- Subtract total repair costs
- This is your maximum offer price
Real-World Examples
Example 1: Suburban Single-Family Home
Property Details:
- 3 bed, 2 bath, 1,500 sq ft
- Built in 1985, needs full renovation
- Asking price: $180,000
Analysis:
- ARV: $280,000 (based on recent comps)
- Repair costs: $45,000 (kitchen, bathrooms, flooring, paint)
- 70% calculation: ($280,000 × 70%) - $45,000 = $151,000
- Decision: Pass (asking price too high)
Example 2: Urban Condo Flip
Property Details:
- 2 bed, 1 bath, 900 sq ft condo
- Built in 1960s, cosmetic updates needed
- Asking price: $120,000
Analysis:
- ARV: $180,000 (based on recent comps)
- Repair costs: $20,000 (paint, fixtures, appliances)
- 70% calculation: ($180,000 × 70%) - $20,000 = $106,000
- Decision: Negotiate (room for profit if price reduced)
Common Mistakes to Avoid
1. Overestimating ARV
Using outdated comps or comparing to properties in better locations can lead to inflated ARV estimates. Always use recent sales (within 6 months) and properties in the same neighborhood.
2. Underestimating Repair Costs
Failing to account for hidden issues like electrical, plumbing, or structural problems. Always include a 15-20% contingency for unexpected repairs.
3. Ignoring Holding Costs
The 70% rule accounts for holding costs, but many investors forget to factor in the time value of money and carrying costs during renovation.
4. Not Considering Market Conditions
In hot markets, you might be able to use 75-80%, while in slow markets, you might need to stick to 65% or lower for safety.
Advanced Strategies and Variations
Adjusting the Percentage
While 70% is the standard, experienced investors often adjust based on:
- Market conditions: 65% in slow markets, 75% in hot markets
- Property condition: Lower percentage for properties needing major work
- Experience level: New investors should use lower percentages for safety
- Local costs: Adjust for higher/lower transaction costs in your area
The BRRRR Strategy Adaptation
For investors planning to refinance and hold, the formula can be modified:
The higher percentage accounts for not having immediate selling costs.
Tools & Resources
Essential Calculation Tools
- 70% Rule Calculator - Quickly evaluate deals and determine maximum offer prices
- ARV Calculator - Determine accurate after-repair values using comparable sales analysis
- Rental Investment Calculator - Analyze potential rental income and cash flow for BRRRR strategy
Research Resources
- Market Data Sources: MLS, Zillow, Realtor.com, County assessor records
- Cost Estimation: HomeAdvisor, local contractor networks, building supply stores
- Permits & Fees: Local permit office fee schedules and requirements
Ready to Apply the 70% Rule?
Use our professional calculators to evaluate your next fix-and-flip opportunity with confidence.