Fix & Flip Costs, ROI, and the 70% Rule

Start with the complete project budget

A flip's profit is its sale price minus every modeled project cost. Purchase and renovation are only the beginning. Acquisition closing costs, permits, contingencies, financing charges, holding expenses, commissions, and seller closing costs can materially change the result.

After-repair value (ARV) is an estimate of the eventual sale price after the planned work. It should be supported by comparable properties and the expected condition at sale. It is not the purchase price plus the renovation bill. Spending another dollar on work does not ensure another dollar of resale value.

Worked example: an all-cash six-month project

Use $200,000 purchase price and $320,000 expected sale price. Set financing to cash, purchase closing costs to 2%, fixed acquisition costs to $1,000, renovation to $40,000, and contingency to 10%. Hold for six months with $800 total monthly holding costs. Set commission to 5%, selling closing costs to 1%, staging to $2,000, and target profit to $40,000.

ROI on total project cost is $45,000 ÷ $275,000 = 16.36%. The tool's cash-required amount excludes selling costs paid at closing, giving $253,800 and a cash ROI of 17.73%. These are project-period returns. A six-month result does not establish a repeatable annual return.

Break-even is not just today’s cost total

Percentage selling costs move with the sale price. Here, fixed costs before percentage selling expenses are $255,800, including staging. The break-even sale price solves sale × (1 − 0.06) = $255,800, giving about $272,127.66.

At a $320,000 sale price and $40,000 target profit, the detailed target purchase price is approximately $204,901.96. It adjusts for the 2% purchase closing cost, rather than assuming every extra dollar of purchase price costs exactly one dollar. Financed scenarios also incorporate modeled purchase-based loan charges.

What the 70% rule does—and does not—say

For this example, 0.70 × $320,000 − $40,000 = $184,000. The remaining 30% is a rough allowance for other costs and desired profit. It is not a required margin, an appraisal method, a government standard, or a guarantee of a profitable purchase.

The tool deliberately shows this shortcut next to a detailed target price. Its shortcut subtracts base renovation without the contingency. The detailed model includes contingency, holding, financing when selected, selling costs, and the target profit. Differences between the two are expected. Use the shortcut to screen a lead, then replace it with a documented budget.

Stress-test the sale, scope, and schedule together

Suppose the sale price falls 5% to $304,000, base renovation rises 15% to $46,000, and the hold grows from six to eight months. Keeping a 10% contingency, $800 monthly holding, and the same selling percentages, total project cost becomes $282,240 and profit falls to $21,760.

That is less than half the original $45,000 profit. Looking only at a 5% sale-price change would miss the combined effect of delays and overruns. A contingency is a budget allowance, not proof that unknown conditions are covered.

Common mistakes, assumptions, and sources

• Subtracting loan principal twice. Purchase cost is already included; financing charges are additional costs.
• Calling cash ROI annualized or comparing it directly with a one-year investment yield.
• Leaving taxes, insurance, utilities, or extension fees out of a delayed project.
• Treating the 70% shortcut as a substitute for comparable sales and contractor quotes.

The loan model uses purchase-price LTV, points on the initial loan, and simple interest on that loan for the full hold. It does not model construction draws, amortization, or a rehab credit line. Cash required is a budget total, not a dated draw schedule or a guarantee that the project can be funded.

All returns are before income tax. Tax treatment depends on facts; property held mainly for sale to customers in a business is not a capital asset under the rules explained in IRS Publication 544. Do not assume a flip receives long-term capital-gain treatment. The budget, ROI formulas, and 70% comparison here are original explanations of the calculator's methodology, not IRS valuation guidance.