The 70% Rule Is Just a Ballpark (Here's How to Go Deeper)

TLDR

The 70% rule gives you a fast offer number, not a real deal analysis. It bakes in a generic 30% cushion that is supposed to cover interest, points, closing costs, utilities, insurance, taxes, and your profit. Run a real calculator with your actual return on cash, and you get a number you can defend.

Table of Contents

• What the 70% Rule Actually Says
• What the 30% Cushion Is Hiding
• Who Actually Uses the 70% Rule
• Going Deeper: Return on Cash
• When the 70% Rule and Real Math Agree
• How to Use Both on Every Deal

What the 70% Rule Actually Says

Here is the whole formula.

Take the arv, which is what you think the house will sell for after it is fixed up. Multiply by 70%. Subtract the rehab. That is your maximum purchase price.

Example on a house with a $300,000 ARV and a $50,000 rehab:

Max offer: $160,000.

That is it. You can do it in your head on a walkthrough. That is the entire reason the rule exists. It is a shortcut for quick offers, not a final answer.

The 70% rule is a napkin. It is not a spreadsheet.

What the 30% Cushion Is Hiding

The 30% you shaved off the ARV has to cover a lot of stuff. The rule acts like that 30% is one big profit number, but it is really five or six different costs stacked together.

Here is what is actually inside the 30%:

• Interest on your purchase loan
• Points on the loan
• closing costs on the buy side
• closing costs on the sell side
• Real estate fees when you sell
• Utilities for the holding period
• insurance during the flip
• property taxes during the flip
• Your actual profit

Every one of those numbers is different for every flipper and every house. Somebody paying cash has no interest or points. Somebody with a high interest rate eats way more of the 30%. Property taxes vary by county. Insurance varies by age, roof, and location. A vacant house in winter burns more utilities than a vacant house in July.

The 30% assumes a flipper holding the property for about four to six months at middle-of-the-road rates. Change any of those assumptions and the number breaks.

Common Mistake

Using the 70% rule on a deal you plan to hold for nine months or on a house in a high-tax county, and then wondering where your profit went. The rule does not know about your situation. It only knows averages.

Who Actually Uses the 70% Rule

The people who lean hardest on the 70% rule are wholesalers, not flippers. Here is why.

A wholesaler runs a team of acquisition people who do not know construction. They need a way to send offers without blowing up the pipeline. The 70% rule is perfect for that. It is fast, it is simple, and it protects the wholesaler from new hires offering too much.

I have used the rule for the same reason. When I am doing a drive-by walkthrough and I need to get a number in front of a seller fast, 70% of ARV minus rehab gets me close. Close is usually good enough to keep a conversation alive.

But when I am actually underwriting a deal I plan to buy, I run the real numbers. Every time.

Use the rule to start the conversation. Use the spreadsheet to close it.

Going Deeper: Return on Cash

The real math starts with one question the 70% rule never asks: what return am I getting on the cash in the deal?

That is what a flip actually is. You park cash in a house for a few months. You want the cash to come back bigger.

Here is what goes into the cash you actually put in:

• Acquisition price
• Rehab budget
• Points on the loan
• Interest during the hold
• Other carrying costs (utilities, insurance, taxes, misc)

Closing costs on the back end come out of the sale, so they do not count as cash you need up front. But they still reduce your profit.

Now you can set a target rate of return on that cash and work backwards.

Cash buyers have a choice that loan-using flippers do not. They can either keep the same rate of return and offer more money than everybody else, or keep the same acquisition price and crush the return. Either way they win, because they are not paying a lender.

Pro Tip

If you are a cash buyer in a competitive market, do not try to hit a 50% return. Offer more than your competition, let the seller love you, and still walk away with a healthy profit. Deal flow beats one-off returns when you are trying to do this more than once a year.

When the 70% Rule and Real Math Agree

Here is the interesting part. If you plug average numbers into a real calculator, the 70% rule lines up almost perfectly.

The conditions where they match:

• Interest rate around 12%
• Points on the loan around 4%
• Hold time around 6 months
• Target return on cash around 15%

Plug those into a deal calculator and the acquisition price comes out within a few thousand dollars of 70% of ARV minus rehab. On a $300,000 ARV with a $50,000 rehab, the 70% rule gives $160,000. A real calculator with those inputs gives about $164,000.

That is the sweet spot where the shortcut works. It is also why the rule exists. Someone ran the math at average flipper conditions, worked backward, and found that 70% of ARV minus rehab gets you there.

But the second any of those four inputs change, the shortcut breaks.

The 70% rule is a calculator with the dials glued in place.

How to Use Both on Every Deal

The way I actually use this on every flip:

1. Walkthrough. Get a rough ARV and a rough rehab.
2. Run 70% in my head. Get a first offer number.
3. Tell the seller a number in the same zip code, leave room to negotiate.
4. Go back to the office. Run the real calculator with my actual interest rate, actual points, actual hold time, and my target return.
5. Compare.
6. If the real number is higher than the 70% number, I can offer more and stay safe.
7. If the real number is lower, I have to either walk or go back and drop my offer.

The 70% rule is a filter. It tells you which houses are worth underwriting. The real math tells you which houses are worth buying.

Key Concept

Quick rules get you in the ballpark. Detailed math gets you in the seat. You need both. Skip the rule and you waste hours underwriting trash. Skip the math and you buy a trash deal at a good-looking price.

FAQ

I am brand new. Should I even use the 70% rule?

Yes, but only as a sanity check. When you are new, you are going to have a hard time estimating rehab anyway, and that is the bigger risk than the 30% cushion being off. Get reps making offers, run the 70% in your head, then go home and run the real math to learn where the rule lies to you on your specific market.

Does the 70% rule work in hot markets?

Sometimes no. In a hot market with compressed margins, sellers will not take 70% of ARV minus rehab. You either adjust your rule up to 75% or 80% and accept a smaller return, or you walk. That is a business decision about how hungry you are, not a math problem.

What if I am paying cash? Do I drop the 30% cushion?

No, but you get to keep more of it. You skip interest and points, so roughly 6% to 8% of the 30% turns into your profit instead of the lender’s. That is why cash buyers can either offer more money or take a bigger return on the same deal. The cushion is still covering closing costs, utilities, insurance, taxes, and real estate fees.

How do I figure out my hold time?

Count from closing day to the day you get paid on the resale. That is rehab time plus listing time plus days under contract plus closing. Most flips land between four and six months. Mine run about five. Track it on your first few flips and use that actual number going forward.

What about the 1% rule for rentals? Is that also just a ballpark?

Yes. The 1 percent rule is the rental-world version of the same shortcut. Monthly rent should be around 1% of the purchase price to roughly cover your debt service and expenses. It is a screening tool, not an answer. Once a rental passes the 1%, you have to run real cash flow numbers with your actual taxes, insurance, management fee, and vacancy rate.