The 70% Rule Is a Shortcut, Not Underwriting

The 70% rule is one of the first formulas many real estate investors learn.

Take the after-repair value, multiply by 70%, subtract repairs, and that is what you can pay.

It is simple. It is memorable. It is also frequently misused.

The 70% rule is best understood as a fast screening shortcut. It is not a substitute for modeling the actual costs of a deal.

What the 70% factor is trying to do

When someone says a flipper should buy at 70% of ARV less repairs, the missing 30% is supposed to cover some combination of:

The problem is that those costs do not stay at 30% across every price range and project type.

A $120,000 property and a $1.2 million property do not have the same dollar economics even if the percentage is identical.

Build the actual project instead

Assume ARV is $500,000.

The 70% rule gives you $350,000 before repairs. If repairs are $80,000, the formula gives a $270,000 MAO.

Now model the actual deal.

That supports an acquisition price of:

$500,000 — $35,000 — $80,000 — $25,000 — $60,000 = $300,000

In this example, the 70% shortcut is more conservative than the detailed model.

Change the project and it can go the other direction.

If rehab takes twelve months, financing costs are $45,000, and the investor needs a $90,000 profit because the project is complicated, the supported purchase price falls to $250,000.

Same ARV. Same rehab. Completely different MAO.

Market velocity matters

A fast-moving market can reduce holding risk. A slow market increases it.

A property that can realistically be renovated and sold in four months is not the same as a project requiring permits, structural work, and a ten-month construction schedule.

Time is a cost.

The 70% rule does not know your timeline.

Capital structure matters

A cash buyer has different economics from a borrower paying 12% interest and two points.

A borrower using hard money plus GAP capital may pay even more.

A buyer with seller financing at 4% and a low down payment may be able to support a higher acquisition price because the monthly capital cost is lower.

The 70% rule does not know how you are financing the property.

Profit requirement should be explicit

The biggest hidden variable inside rules of thumb is investor profit.

What are you trying to make?

A fixed dollar amount? A percentage of ARV? A return on total cost? A return on cash invested?

If the project has a potential $40,000 profit but requires $300,000 of capital and a year of work, the dollars alone may not justify the risk.

Put your required profit in the model instead of hoping the 70% factor leaves enough behind.

Use the 70% rule the right way

I still like fast rules. They save time.

Use 70% or another factor to screen a stack of leads quickly. Then, for the opportunities that survive, replace the shortcut with actual line items.

Your process can be:

1. Fast screen. 2. Detailed project cost. 3. Financing model. 4. Resale sensitivity. 5. Downside case. 6. Final offer range.

That keeps speed without sacrificing accuracy.

A better question

Instead of asking, "Does this meet the 70% rule?" ask:

That question takes longer than multiplying by 0.70.

It also has a much better chance of keeping you out of a bad deal.

When the rule can be directionally useful

There are situations where a rule like 70% earns its keep. If you are reviewing 100 raw leads, you need a fast way to eliminate obvious non-starters. A conservative factor can help you focus on the 10 or 15 properties that deserve real analysis.

It can also be useful when your market and business model are highly repetitive. If you have completed dozens of similar cosmetic rehabs in the same price band, your historical selling, financing, carrying, and profit costs may cluster closely enough that a percentage becomes a reasonable shorthand.

But that percentage should come from your own operating history, not from somebody else’s market.

Calculate your completed projects. What percentage of ARV was consumed by selling costs? What was average financing and carry? How much margin did you actually need? You may discover that your business behaves more like a 74% rule on light rehabs and a 66% rule on heavy projects. That is far more useful than forcing every property into one number.

A rule should trigger questions, not stop them

If a deal passes the quick rule, ask what could make the detailed model worse. If it fails, ask whether there is a legitimate structural reason the shortcut is too conservative. Maybe seller financing dramatically reduces capital cost. Maybe the property is already renovated. Maybe the exit buyer pays transaction costs. Maybe the project has an unusually fast path to resale.

A shortcut is supposed to save time. The moment it prevents you from seeing the real economics, it has stopped doing its job.