If you’re looking for a straightforward way to analyze real estate investments, the 70% rule can be a handy shortcut. The 70% rule says you shouldn’t pay more than 70% of a property’s after-repair value (ARV), minus the cost of needed repairs, when flipping a house.
By sticking to this, you can get a sense of whether a property has enough profit potential and avoid biting off more risk than you might realize.
Understanding this rule lets you analyze deals quickly and sidestep overpaying—a mistake that trips up plenty of new investors. It’s popular because it keeps your numbers realistic and gives you a baseline for negotiations.
If you want to get the most out of the 70% rule, you’ll need to know how to use it, where it makes the most sense, and what other numbers to keep in mind for a solid investment plan.
Key Takeaways
- The 70% rule helps you estimate the max price for investment properties.
- It can keep you from overpaying when you’re sizing up a flip.
- Pair it with other financial tools for a smarter investment approach.
Understanding the 70% Rule in Real Estate
The 70% rule acts as a simple guide when you’re sizing up fix-and-flip properties. It’s all about figuring out the maximum price you should pay so you’ve got enough room for repairs, costs, and a profit.
Definition and Core Principles
The 70% rule helps you decide what to offer based on a property’s after-repair value (ARV). Basically, you shouldn’t pay over 70% of the ARV minus repair costs.
This guideline gives you some breathing room for surprise expenses and helps protect your cash. The 70% cap covers renovation, holding, and transaction costs, plus your profit.
It’s especially helpful in competitive markets, whether you’re new to the game or a seasoned investor. Using this rule gives you a safety margin, but it’s not a guarantee. It’s just one piece of the puzzle, so you’ll want to back it up with other analysis and a bit of diligence. If you want a deeper dive into the core principles of the 70% rule, there are plenty of resources out there.
Calculating the 70% Rule Formula
To use the 70% rule, you need two numbers: the After-Repair Value (ARV) and the total repair costs. Here’s the basic formula:
Maximum Offer Price = (ARV x 0.70) – Estimated Repair Costs
First, look up comparable sales to figure out the ARV. Then, tally up all the repairs—labor, materials, the whole lot. Plug those into the formula and you’ll have your max offer.
This method gives your investment space for costs and profit. If you like step-by-step details, check out this guide on calculating the 70% rule in house flipping.
Examples of 70% Rule in Practice
Say you’ve got a property with an ARV of $300,000 and you think repairs will run $40,000. Here’s how it plays out:
- 70% of ARV: $300,000 x 0.70 = $210,000
- Subtract repairs: $210,000 – $40,000 = $170,000
- Max offer: $170,000
If you’re eyeing a place with a $500,000 ARV and $80,000 in repairs, the max offer comes out to $270,000. This approach works whether you’re in a big city or a small town.
Looking at more examples of 70% rule calculations can make you more comfortable with the process.
Applying the 70% Rule to Investment Strategies
The 70% rule gives you a quick, practical way to decide what to pay for an investment property. It helps you zero in on deals with enough profit margin, and it’s a good way to spot when you might want to slow down and double check the details.
Using the Rule for Property Flipping
If you’re flipping houses, the 70% rule lets you size up a property fast by calculating the most you should spend. The rule says you shouldn’t go over 70% of the after-repair value (ARV), minus what you expect to spend on repairs.
Here’s the formula again: Maximum Offer = (ARV x 70%) – Repair Costs
For example, if a home’s ARV is $300,000 and you estimate repairs at $40,000, your max price is $170,000. This buffer helps you cover unexpected expenses, closing costs, loan fees, and profit. If you use it consistently, you can move fast in competitive markets. Want more info? Check out Lima One Capital’s guide.
Identifying Profitable Deals
The 70% rule helps you filter out duds before you waste time or money digging deeper. By running the numbers based on market data and repairs, you can see which properties fit your investment goals right away.
In fast markets, it gives you a clear benchmark for comparing options. Lots of investors make a shortlist and run the rule on each one, tossing out anything that doesn’t make the cut.
But don’t stop there—mix in other numbers like cash flow and neighborhood comps for a full picture. Making data-driven offers helps you dodge risk and focus on real profit opportunities. There’s a good breakdown for flippers at the Foreclosure Flips.
Limitations and Common Mistakes
The 70% rule is helpful, but it’s not magic. It doesn’t account for market swings, weird property quirks, or sudden changes in supply and demand.
Sometimes you need to tweak the percentage, especially in hot or slow markets. One of the biggest mistakes? Underestimating repair costs. That can make you overpay and eat into your profit.
If you lean too hard on the 70% rule and ignore other expenses—like closing costs, holding costs, and taxes—you might be in for a surprise. Use this rule as a starting point, not the whole story. Always double-check your math, look at local trends, and adjust your offer as needed. For more takes, check Valkere Group’s explanation.
Frequently Asked Questions
The 70% rule gives you a quick way to estimate a safe offer price by factoring in both the after-repair value and renovation costs. It’s a solid guideline for buying, managing risk, and budgeting if you’re flipping or wholesaling for profit.
How do you calculate the maximum purchase price using the 70% rule?
First, figure out the after-repair value (ARV) of the property. Multiply that by 70%, then subtract your repair estimates.
This gives you the highest price you should pay if you want to keep risk down and profit up. It’s a straightforward ceiling based on what you think the place will sell for later.
What are the risks of not following the 70% rule when flipping houses?
If you ignore the 70% rule, you might overpay. That can wipe out your profit after repairs, closing costs, and surprise expenses.
Skipping this guideline also puts you at more risk if the property doesn’t sell at your expected ARV. In a down market, you could even lose money.
Is the 70% rule applicable across all real estate markets, like in California, for example?
The 70% rule works as a baseline in lots of markets, but places like California are a different animal. High prices and tight margins mean you might need to tweak the percentage or add more local data to your analysis.
Always look at local costs, demand, and competition before going all-in on the 70% rule. Here’s a guide on the 70% rule in house flipping if you want more details.
Can the 70% rule in real estate be effectively applied to wholesaling properties?
You can use the 70% rule to set a max offer when wholesaling. It helps make sure end buyers—like flippers—see enough upside, so you’re more likely to close your contract assignment.
This approach also protects your wholesale fee and keeps your deals attractive to other investors.
How does the 70% rule affect the budgeting process for renovations in house flipping?
The rule forces you to think about renovation costs upfront. You’ve got to be accurate with your repair estimates and subtract them from your 70%-of-ARV ceiling.
If you lowball repairs, you’ll probably overpay, and your project could flop. Using the rule nudges you to plan carefully and budget with precision, which means fewer nasty surprises during the remodel.
In what ways can the 70% rule differ when accounting for the productivity of a real estate investment?
The rule mainly compares resale value with initial and repair costs. It doesn’t really take cash flow from rentals, long-term appreciation, or tax perks into account.
If you’re planning to hold and rent, or you’re banking on above-average appreciation, you’ll probably want to tweak the rule or toss in some extra metrics. Investors often adjust the percentage or mix the rule with other analyses to match their own risk tolerance and goals.
Want to know if that deal is actually worth pursuing?
Stop relying on outdated spreadsheets – analyze your next real estate deal like a pro with DealCheck.
Enter the code BESTDEAL at check out and receive a 20% Off Discount!
Start your free analysis today!
Are you a contrarian investor with the foresight to spot opportunities where others see only chaos?
Rental Property Management in a Market Crash is your essential guide to navigating turbulent economic waters. Learn how to capitalize on market downturns that inevitably occur, drawing parallels between the Global Financial Crisis of 2007-09 and current market conditions.
This book offers invaluable insights into the dynamics of the housing market during a downturn, equipping you with the knowledge to make informed decisions and build a resilient investment portfolio.
Don’t just weather the storm – learn to thrive in it. Get your copy now from your favorite bookseller:
- Amazon as an ebook
- Books2Read for Apple, Barnes & Noble, Kobo, Scribed, and 8 more sellers with both eBook and paperback options available
- Payhip as a downloadable PDF
Ready to take your business to the next level?
- Subscribe to our newsletter
- Visit the learning center
- Learn more about our consulting services
