New real estate investors fear overpaying for a property, underestimating repairs, and losing profits. This risk is why experienced investors rely on guidelines to evaluate deals and protect their investments.

The 70% Rule helps real estate investors avoid costly mistakes. This house flipping formula calculates the maximum price you should pay for an investment property to maintain profitability.

In this article, we'll explain the 70% rule in real estate, how the formula works, provide a real-world example, and discuss when to use it and when to be cautious.

What is the 70% Rule in Real Estate?

The 70% rule is a real estate investment guideline stating an investor should pay no more than 70% of a property's After-Repair Value (ARV) minus repair costs.

This rule creates a financial buffer to protect your investment. It's not just about getting a good purchase price; it's about ensuring there's enough margin to cover all costs and generate a reasonable profit. The output is the Maximum Allowable Offer (MAO); the highest price to consider for a property. House flippers and wholesalers consider this calculation fundamental.

Breaking Down the 70% Rule Formula

The formula is straightforward and powerful:

MAO = (ARV x 0.70) – Estimated Repairs

The Core Formula: Maximum Allowable Offer (MAO)

The MAO formula in real estate represents the maximum price you can offer while maintaining your profit objectives. Exceeding this maximum allowable offer significantly increases your risk of losing money or drastically reducing your profit margin, which defeats the investment purpose.

Component 1: After-Repair Value (ARV)

The estimated market value of the property after all renovations and repairs, known as After-Repair Value (ARV), is the selling price in its fully renovated condition.

To determine ARV accurately, research comparable properties ("comps") in the same neighborhood that have recently sold. These comps should match your property's characteristics (bedrooms, bathrooms, square footage) and be in the expected condition of your renovated property. Analyzing comps is the best way to determine a realistic After-Repair Value.

Component 2: The "70%" Factor and 30% Buffer

The heart of this rule is the 70% multiplier, which creates a critical 30% buffer in your deal structure. This margin isn't arbitrary; it's designed to cover all costs beyond the purchase price and repairs:

• Profit Margin: Your ROI and risk compensation (typically 10-15%)
• Selling Costs: Real estate agent commissions, closing costs, transfer taxes (typically 8-10%)
• Holding Costs: 3-5% of mortgage payments, property taxes, insurance, and utilities during renovation.
• Contingency Fund: Extra cushion for unexpected problems or delays (typically 3-5%)

Component 3: Estimated Repair Costs

Accurately estimating repair costs is often the most challenging and risky part. A miscalculation can quickly erode your profit margin or result in a loss.

To get accurate repair estimates, conduct a detailed property inspection, get multiple quotes from licensed contractors, and add a contingency buffer (10-20%) to your estimate. For homes with extensive damage, sellers often prefer to work with a buyer who purchases as-is, eliminating this guesswork.

The 70% Rule in Action: A Step-by-Step Example

Let's test this rule with a hypothetical property:

Scenario: You've found a distressed single-family home in a desirable neighborhood.

Step 1: Determine the After-Repair Value (ARV).

After researching comps, you find that similar, fully renovated homes in the area sell for $300,000. This is your ARV.

Step 2: Apply the 70% Multiplier.

$300,000 (ARV) x 0.70 = $210,000.

Step 3: Estimate Repair Costs.

After a contractor walkthrough, you estimate needing $40,000 for a new kitchen, updated bathrooms, flooring, and paint.

Step 4: Calculate Your Maximum Allowable Offer (MAO).

$210,000 (MAO) - $40,000 (Repairs) = $170,000.

According to the house flipping formula, the highest offer for this property to keep your 30% buffer for selling costs, holding costs, and profit margin is $170,000.

Pros and Cons of the 70% Rule

Advantages of the Rule

• Quick Screening Tool: Rapidly evaluate potential deals and eliminate non-starters without wasting time on detailed analysis.
• Removes Emotion: Replaces gut feelings with objective calculations, preventing the excitement of a potential deal from clouding your judgment.
• Enforces Discipline: Creates a structured approach to account for all costs and maintain a healthy profit margin from the beginning.

Disadvantages of the Rule

• It's a Guideline, Not a Law: Market conditions and property specifics require adjustments to the percentage.
• Dependent on Accurate Inputs: The rule relies on your ARV and repair cost estimates. "Garbage in, garbage out" applies here.
• Market Inflexibility: In competitive markets, strictly adhering to the 70% rule might mean you never win a bid. Some investors adjust to 75% or 80% in hot markets.
• Not for All Strategies: This rule may not suit long-term rental strategies where ongoing cash flow, not immediate resale value, is the primary goal; it is ideal for flipping.

How Professional Home Buyers Calculate Offers

Understanding the 70% rule reveals how professional real estate investors think when making offers. Companies like GetHomeCash use similar principles, with market data and experience. We assess a property's market value and condition to formulate competitive cash offers that benefit both parties.

Instead of calculating repair costs and managing a renovation, we buy homes "as-is," so you don't worry about repairs, cleaning, or showings. We can close in 7 days, providing a simple and certain sale because we pay cash and cover standard closing costs.

If you want a straightforward, fast way to sell your home hassle-free, get your free, no-obligation cash offer from GetHomeCash today.

The Bottom Line: Is the 70% Rule Still Relevant?

Absolutely. The 70 percent rule in real estate is still relevant today, especially for beginners. It provides a conservative approach to deal evaluation that helps new investors avoid costly mistakes while developing their skills.

As investors gain experience, they adjust the percentage based on properties, market conditions (hot vs. cool markets), and exit strategies. With experience, flexibility becomes important, but the fundamental principle, calculating offers based on ARV minus costs with a buffer, remains timeless in real estate investing.

FAQ

What does the 30% in the 70% rule cover?

It's a buffer covering three categories: your target profit margin, holding costs (taxes, insurance, utilities during the project), and selling costs (agent commissions, closing costs). It cushions against unexpected renovation expenses.

How accurate is the 70% rule?

The accuracy of the rule depends on your ARV and repair cost estimates. If those numbers are wrong, the final MAO will be wrong. It's a reliable framework, but not a guarantee of profit; your due diligence in determining accurate inputs is essential.

Can I use an 80% or 65% rule instead?

Yes. Experienced investors adjust the percentage. In a competitive market, they use an 80% rule to win bids (accepting a lower profit). For a high-risk project or very high repair costs, they use a 65% rule for a larger safety margin.

Does the 70% rule work for the BRRRR method?

Yes, the 70% rule is a critical component of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method. It's used in the "Buy" phase to ensure you purchase the property at a deep enough discount so that the "Refinance" step allows you to pull out most or all of your initial investment.