The 70% rule, and the costs it's protecting you from
The 70% rule is the standard heuristic flippers and wholesalers use to set a maximum offer: pay no more than 70% of the after-repair value minus the repair costs. A house that will be worth $300,000 finished and needs $50,000 of work has a ceiling of $160,000. The 30% the rule holds back is not your profit — it's the buffer that absorbs everything between the purchase and the closing table, and profit is whatever survives.
The real cost stack. Purchase price and rehab are the two numbers everyone budgets, because they're visible and quoted. Three more quietly eat the margin. Holding costs — property tax, vacant-home insurance (which costs more than a standard policy), utilities, and HOA dues — accrue every month you own an empty house. Financing costs come in two parts: origination points charged once on the loan amount, and interest that accrues for as long as you hold. And selling costs — agent commissions plus title, escrow, and transfer taxes — typically run 6–8% of the sale price, charged off the top when you finally sell. That last one is why a higher ARV doesn't raise profit one-for-one: the selling bill scales right along with it.
ARV accuracy is the whole ballgame. Every output on this page — profit, ROI, your maximum offer, your margin — is measured against a number that hasn't happened yet. An ARV that's 10% optimistic doesn't make the deal 10% worse; because the profit is a thin slice of a large number, it can erase the margin entirely. Build the ARV from closed sales of genuinely comparable finished homes in the same neighbourhood, not from listing prices and not from what the seller thinks the house will be worth. If the comps are thin or the neighbourhood is mixed, that uncertainty is a reason to bid lower, not a reason to round up.
Time is the risk you underestimate. Two of your cost buckets are billed by the month and neither adds a dollar to the ARV. Permits stall, contractors move to other jobs, a hidden problem opens behind a wall, and the market takes longer to produce a buyer than your spreadsheet assumed. Model a hold longer than you're hoping for — if the deal only works at four months, it isn't a deal, it's a bet on nothing going wrong. Once the property is finished, compare it against a hold: the cap rate calculator shows what it would earn as a rental, and the BRRRR calculator models refinancing your capital out instead of selling it.
Profit on a flip is ARV minus five cost buckets this calculator tracks separately: purchase, rehab, holding, financing (points + interest), and selling costs. The 70% rule — pay no more than 70% of ARV minus rehab — exists to leave room for the last three, which is where flips that look profitable on paper actually lose money.
The cost stack, worked through the module's own math
Take a property with a $185,000 purchase price, $45,000 rehab budget, and $290,000 ARV, financed at 85% loan-to-purchase with 2 points and a 12% annual hard-money rate, held 5 months at $900/month carry, and sold at an 7% selling cost.
Why this deal is more fragile than the profit number suggests
Profit is $24,192 against total project cost of $265,808 — an 8.3% margin on the ARV. That margin is the whole cushion against everything that hasn't happened yet: an ARV that appraises soft, a rehab that runs over, or a hold that stretches past 5 months. Because selling costs are a percentage of the sale price rather than a fixed number, a lower actual sale price cuts profit twice — once directly, and once by also lowering the selling-cost deduction less than proportionally, since the fixed costs (purchase, rehab, most of holding and financing) don't move with the sale price at all. The break-even sale price on this deal — where profit is exactly zero after selling costs — works out to costs-before-sale ÷ (1 − 0.07) = $245,508 ÷ 0.93 ≈ $263,988. That's the number that matters when a buyer's agent starts talking about pricing the property to move.
The tax treatment is not the same as a hold
A flip and a BRRRR hold are taxed differently in a way that's easy to miss. A rental held for the long term gets 27.5-year depreciation under IRS rules and, if later sold, some of that depreciation is recaptured as unrecaptured Section 1250 gain — the IRS caps that portion "at a maximum 25% rate" per IRS Topic 409. A flip that's bought, rehabbed, and resold within months is generally never placed into rental service, so that depreciation-and-recapture mechanic typically doesn't apply at all — there's no 27.5-year schedule to have claimed against in the first place. Instead, the profit is usually taxed at ordinary income rates, since gains on assets held one year or less are treated as short-term rather than qualifying for the lower long-term capital gains rates that same IRS guidance describes for longer holds. That's a materially different tax picture from a BRRRR exit, and it's worth having your accountant confirm which bucket a specific deal falls into — including whether frequent flipping classifies you as a dealer, which changes the analysis further and is outside what this calculator or this article models.
Methodology
The worked example and sensitivity figures use this calculator's own module arithmetic exactly: loan amount, points, interest-over-hold, holding cost, selling costs, total project cost, profit, cash invested, ROI, the 70% rule ceiling, and break-even sale price. The short-term versus long-term capital gains distinction and the unrecaptured Section 1250 wording are drawn from IRS Topic No. 409; no state tax rate or dealer-status determination is assumed.
Sources
- IRS Topic No. 409 — Capital Gains and Losses (unrecaptured Section 1250 gain) — accessed 2026-09-07
The cost stack on a $320,000 ARV flip
| Cost | Amount | How it's calculated |
|---|---|---|
| Purchase price | $180,000 | As-is offer |
| Rehab budget | $45,000 | Labour, materials, permits, contingency |
| Holding costs | $5,400 | $900/mo × 6 months vacant |
| Points | $2,880 | $144,000 loan × 2 points |
| Loan interest | $7,920 | $144,000 × 11% × 6/12, interest-only |
| Selling costs | $22,400 | 7% of the $320,000 sale price |
| Total project cost | $263,600 | Sum of the above |
| Projected profit | $56,400 | ARV − total project cost |
70% rule max offer here is $320,000 × 0.70 − $45,000 = $179,000 — this $180,000 offer is $1,000 above the ceiling. Illustrative arithmetic only; your inputs will differ.
Frequently asked questions
What is the 70% rule in house flipping?
The 70% rule is a standard heuristic among flippers and wholesalers: pay no more than 70% of a property's after-repair value (ARV) minus the repair costs. On a house with a $300,000 ARV needing $50,000 of work, the maximum offer is $300,000 × 0.70 − $50,000 = $160,000. The 30% that the rule holds back isn't profit — it has to cover holding costs, financing, selling costs, and the mistakes you haven't found yet. What's left after all of that is the profit.
How do you calculate profit on a fix and flip?
Profit = ARV − total project cost, where total project cost is the purchase price plus the rehab budget plus holding costs plus financing costs plus selling costs. Holding costs are your monthly carry (property tax, insurance, utilities, HOA) multiplied by the months you own it. Financing costs are the origination points (loan amount × points %) plus interest during the hold (loan amount × rate × months ÷ 12). Selling costs are a percentage of the sale price. Skipping any of the last three is the most common way a flip that looked profitable on paper isn't.
What costs do flippers forget to include?
Almost always the same three: holding costs, financing costs, and selling costs. Purchase price and rehab are visible and easy to budget, so they get the attention. But every month you own the property you pay taxes, insurance, and utilities on an empty house while loan interest accrues — and when you finally sell, agent commissions and closing costs come off the top of the sale price. Together those three can consume a large share of what looked like the margin.
How much are selling costs on a flip?
In the US, budget roughly 6–8% of the sale price: agent commissions plus title, escrow, transfer taxes, and any concessions you make to the buyer. Because they're charged as a percentage of the sale price, they scale with your ARV — a higher resale price also means a higher selling bill, which is why raising the ARV estimate doesn't raise profit one-for-one.
Why does hold time matter so much on a flip?
Because two of your cost buckets are charged by the month. Every extra month adds another round of property tax, insurance, and utilities, and another month of interest on the flip loan. Permit delays, contractor scheduling, weather, and a slow market all stretch the timeline, and none of them add anything to the ARV. That's why it's worth running the numbers at a hold time longer than the one you're hoping for — if the deal only works at four months, it isn't really a deal.
Is the 70% rule too strict?
Experienced flippers in competitive markets sometimes go above 70% when they have reliable rehab estimates, cheap capital, and a fast crew — the rule is a heuristic, not a law. But it exists because the buffer absorbs real risks: rehab overruns, an ARV that comes in soft, and a hold that runs long. Paying above the ceiling means you're relying on your estimates being right, rather than being protected if they're wrong.