The 70% Rule: you may or may not be using it, or you may or may not even really understand why it exists and its benefit.
So that’s why I want to talk about what the 70% formula really is, when and why it’s a good idea to use it, and exactly how to use it to quickly find and filter the breadwinners and moneymakers versus the marginal or losing deals.
Plus, I’ll touch on the biggest 70% rule mistakes that we see people making when, when you should think about tweaking it, and even the inspection checklists that we use in the process (you can download it below!).
Of course, in real estate, there are a ton of purported “rules” to follow.
But this one is actually worth your time.
Let’s get started!
What is the 70% Rule for house flipping?
The 70% rule is a formula for flipping a house that stands as a tried-and-true guideline in real estate investing. The rule allows a real estate investor to carefully calculate the numbers on a property to ensure there’s profit after the purchase, renovation, and resale.
Smart real estate investors make use of some form of the 70% formula to maximize their profits on every real estate deal.
Start with the deal
To follow the 70% rule, you first need to find a good fix-and-flip deal. This is where many people go so wrong — they either don’t know how to find deals or they get caught up in the emotion of house flipping and don’t take the time to do their due diligence.
The house flip 70% rule is important because it allows you to understand what your max allowable offer should be on a property.
Investors know they need to get the property at the lowest purchase price possible. They need to know what the repair costs will be and comps in the neighborhood to make a profitable deal.
Know the comps (comparables)
Comps are simply comparable properties in the same area and with the same specs as the investment property. Real estate investors use comps to understand the market value of similar homes in the neighborhood.
Investors want to discover what has sold to understand a possible sale price they could get on an investment property.
How to find comps
One of the best (and most accurate) methods is making friends with a real estate agent who has access to the Multiple Listing Service (MLS) —the most up-to-date information on home sales.
A real estate agent can use this information to generate a Comparative Market Analysis (CMA) report that gives you information about the neighborhood and the home values in the area of the investment property.
There are several real estate websites that provide recent home sale information, like Redfin and Zillow. When using these websites, search for your target area using the home’s address or ZIP code and look for a link or button for “recently sold.”
This is one way of understanding values in the area. That being said, nothing beats having direct access to MLS data.
Use as many resources as necessary to get an accurate idea of the after repair value (ARV) of a property in the target neighborhood
Stay historically relevant
When running comps, don’t look too far back in an area’s home sale history. The real estate market changes quickly in terms of home values. What sold 3 months ago at a particular price might not accurately reflect today’s current home values.
Know the neighborhood
Don’t run your comps analysis on the other side of town. As a real estate investor you should know the home values in the target neighborhood. Home values can vary wildly depending on the neighborhood or subdivision, so exercise care when doing your analysis.
Match the specs
Match the specs on your target property with the comps in the neighborhood. Things you want to look at to make this comparison include:
- Square footage of home
- Type of home: house, condo or multifamily
- # of bedrooms
- # of bathrooms
- Lot size
- Year built
- Any HOA fees?
There’s always some risk involved with a fix-and-flip, so don’t forget to do your homework before diving in. Make sure you know what the current market conditions are in your area, and be prepared to adjust your budget and timeline accordingly.
Why follow the 70% rule for flipping houses?
It’s smart because:
- The 70% rule helps you stay within budget and avoid over-spending.
- Following the 70% rule usually means that you will make a profit on your real estate investing, with reduced risk.
- It’s easy to follow. No serious long math or complex calculations are involved. No software is needed. Just a simple formula.
Using the rule to find deals
- Look for properties that are priced below market value. To make a good profit margin, you need to find a property that is priced well below market purchase price. This will give you room to make renovations and still sell the property at a profit.
- Check out foreclosure and short sale listings. Many times, these properties will be priced well below market value, making them perfect candidates for flipping.
- Network with other investors. These people may be able to tip you off to a good deal that is going to meet the 70% rule.
- Keep an eye on local newspapers. These can be a great source for finding fix-and-flip deals.
- Use online resources. There are many national and local websites that can provide a source of properties that meet the house flip 70% rule.
- Run Craigslist ads — a cheap and efficient way of meeting potential sellers with off-market properties. Don’t run free ads — they’ll get flagged by Craigslist or one of your competitors.
- Go “old school” by sending mailers through USPS. Identify some target properties and use a handwritten note.
- Post bandit signs. Chances are you’ve seen others doing this. Look for a busy street corner that affords maximum visibility and exposure.
- Run Facebook or Google Search ads. Digital advertising can be a great way of catching people’s attention as they browse the web. But a word of caution: Know what you’re doing. It’s very easy to burn through cash if your ad campaigns are not set up properly. If you don’t have the time or skill set to run an ad campaign, find a freelancer or agency that specializes in lead generation.
How to calculate the 70% rule
You need to know the After Repair Value — ARV — of the house.
Now, understanding ARV begins with a knowledge of the local market, property, and neighborhood. You will need a solid understanding of comps in the neighborhood and the purchase price for those properties to understand what the property would sell for when put on the market following renovations.
Find an inspector
you’ll also need to understand the repair costs — attention to detail and being thorough on this point will play to your favor. Unforeseen damages or repairs can kill a good deal. Don’t gloss over anything, big or small, when it comes to understanding your costs.
Bring in an inspector or a very thorough contractor to evaluate the home and find any hidden damages.
Use a checklist
Walk the property, examining the exterior & interior spaces, plumbing, electrical, and more. Use a checklist to track things that might need repair. Work with an inspector to go over your results and make sure that nothing is overlooked on the evaluation.
You can download our checklist here — and actually use it for you deals!
The 70% Rule Formula
After repair value (ARV) x 70% — estimated repair costs = MAO (maximum allowable offer/max buying price)
Before you get to this stage, you should already have your estimated renovation costs and know the after repair value of the property. Without these, you can’t run the formula.
Let’s play this out with some real numbers:
$193,000 x 0.70 – estimated repair costs = MAO
$193,000 x 0.70 = $135,000
$135,000 – $80,000 in estimated repair costs = $55,100 MAO
This was a real deal and this investor got even better price of $50,000, resulting in $40,000 profit! BOOM.
 Before |  After |
Adjustments to the 70% rule in different markets
While the 70% rule is a good guideline to follow with house flipping, it’s important to remember that it is not set in stone. Depending on the market conditions, you may need to adjust your budget and timeline accordingly.
For example, if the market is hot and properties are selling quickly, you may be able to spend more on renovations without sacrificing your profits. However, if the market is slow, you may need to spend less on renovations and/or wait longer for the property to sell.
So, you could calculate your max offer based on a 75% or 80% rule in the formula instead. The 70% rule is a flexible guideline that can be adjusted to fit the current market conditions. So don’t be afraid to experiment a little and see what works best for your area!
Get to know the numbers with the 70% rule
One of the benefits of using the 70% rule when flipping houses is that it helps protect your investment.
By following this guideline, you are ensuring that you don’t overspend on renovations and that your estimated costs are accurate. This protects you from unexpected expenses that can eat into your profits.
And, by keeping your budget tight, you are less likely to get in over your head with a fix-and-flip. This can help minimize your risk when flipping houses.
So, if you’re looking to flip houses without taking on too much risk, using the 70% rule is a good way to do it!