Understanding the 70% Rule: The Complete Guide
The 70% rule is one of the most widely used guidelines in real estate investing, particularly for fix-and-flip properties. This conservative approach helps investors quickly evaluate potential deals and avoid overpaying for properties that require significant renovation work.
What is the 70% Rule?
The 70% rule states that an investor should pay no more than 70% of a property's After Repair Value (ARV) minus the cost of necessary repairs and renovations. This rule provides a built-in safety margin for profit, unexpected costs, and market fluctuations.
Why Use the 70% Rule?
The 70% rule serves multiple important purposes in real estate investing:
- Built-in Profit Margin: Ensures adequate profit potential for the investment
- Safety Buffer: Accounts for unexpected repair costs and market downturns
- Quick Evaluation: Provides a fast way to screen potential deals
- Conservative Approach: Reduces risk of overpaying for properties
- Industry Standard: Widely accepted benchmark used by experienced investors
70% Rule Example
Property Details:
After Repair Value (ARV): $300,000
Estimated Rehab Costs: $40,000
Calculation:
70% of ARV: $300,000 × 70% = $210,000
Maximum Purchase Price: $210,000 - $40,000 = $170,000
This means you should pay no more than $170,000 for this property to follow the 70% rule.
Components of the 70% Rule
After Repair Value (ARV):
- Estimated market value after all renovations are complete
- Based on comparable sales of similar renovated properties
- Should account for current market conditions
- Conservative estimates are recommended
Rehab Costs:
- All renovation and repair expenses
- Materials, labor, permits, and contractor fees
- Should include a contingency buffer (10-20%)
- Don't forget closing costs and holding expenses
Adjusting the Rule Percentage
While 70% is the standard, some investors adjust this percentage based on:
- Market Conditions: Hot markets might require 75-80%, slow markets might allow 60-65%
- Experience Level: New investors should stick to 70% or lower
- Property Type: Different property types may warrant different percentages
- Risk Tolerance: Conservative investors might use 60-65%
✅ Advantages of the 70% Rule
- Simple and quick to calculate
- Provides conservative safety margin
- Widely accepted industry standard
- Accounts for unexpected costs
- Helps avoid emotional decision-making
- Good for beginners to learn discipline
❌ Limitations of the 70% Rule
- May be too conservative in hot markets
- Doesn't account for holding costs
- Ignores financing costs and terms
- May miss good deals in competitive markets
- Doesn't consider timeline factors
- One-size-fits-all approach
Market-Specific Considerations
Hot Markets
In competitive markets with high demand and low inventory:
- May need to adjust to 75-80% rule
- Focus on properties needing cosmetic work
- Move quickly on good opportunities
- Consider alternative strategies
Slow Markets
In markets with high inventory and longer selling times:
- Can be more conservative with 60-65% rule
- Account for longer holding periods
- Factor in additional carrying costs
- Be selective with properties
Luxury Properties
High-end properties often require different approaches:
- Renovation costs may be higher percentage
- Longer selling times typical
- Smaller buyer pool affects marketability
- Consider using 60-65% rule
Common Mistakes with the 70% Rule
- Overestimating ARV: Being too optimistic about property value after repairs
- Underestimating Rehab Costs: Not accounting for all necessary repairs and improvements
- Ignoring Holding Costs: Forgetting utilities, insurance, taxes during renovation
- Not Including Contingency: Failing to budget for unexpected issues
- Ignoring Market Conditions: Not adjusting for local market realities
- Emotional Decisions: Abandoning the rule when falling in love with a property
Beyond the 70% Rule
While the 70% rule is an excellent starting point, experienced investors often consider additional factors:
Total Cost Analysis:
- Purchase price + rehab costs + holding costs + selling costs
- Financing costs and interest during renovation
- Opportunity cost of capital
Timeline Considerations:
- Length of renovation period
- Seasonal market factors
- Personal time investment
Important: The 70% rule is a guideline, not a rigid requirement. Successful investors understand when to be flexible while maintaining conservative principles. Always conduct thorough due diligence beyond simple rule-of-thumb calculations.
Alternative Rules and Strategies
Some investors use variations of the traditional 70% rule:
- 80% Rule: Used in very hot markets where competition is fierce
- 1% Rule: Monthly rent should be 1% of purchase price (for rentals)
- BRRRR Strategy: Buy, Rehab, Rent, Refinance, Repeat approach
- Wholesale Rule: Often use 60-65% to allow for wholesaling markup
Technology and Modern Applications
Modern real estate investors enhance the 70% rule with:
- Automated Valuation Models (AVMs) for ARV estimates
- Contractor bidding platforms for accurate rehab costs
- Market analysis software for local conditions
- Deal analysis spreadsheets and mobile apps
The 70% rule remains a fundamental tool in real estate investing, providing a quick and conservative method for evaluating fix-and-flip opportunities. While markets and strategies evolve, the principle of maintaining adequate profit margins and safety buffers continues to be essential for successful real estate investing.