Short version: A flip makes money on the buy, not the sale. Start from a conservative after-repair value, subtract everything it costs to get there (purchase, rehab, holding, financing, and selling costs, plus a contingency), and what's left is your profit. The 70% rule is a screening shortcut, not an analysis. The numbers that kill most deals are the ones left off the first spreadsheet: six months of holding costs instead of three, 8% to sell instead of 5%, and a rehab budget with no contingency.
I'm a controller by trade and I've run real estate books for a long time, which means I've seen the flip spreadsheet that said $40,000 and the closing statement that said $6,000. The gap is never one big mistake. It's five small omissions that each looked harmless. This is the analysis that catches them before you wire the earnest money.
Every number in a flip flows backward from the after-repair value (ARV), the price the finished house sells for. Get it wrong by 10% and nothing else matters. The discipline:
The shorthand everyone learns: maximum purchase price = 70% of ARV minus rehab cost. On a $400,000 ARV with $60,000 of rehab, that's $220,000. The 30% haircut is meant to cover holding, financing, selling costs, and profit all at once.
It's a decent first screen and a bad final answer, because the 30% is a fixed percentage standing in for costs that aren't fixed. It lies when:
Use it to decide whether to spend an hour on the deal. Then do the real math.
Build it line by line. Here's the structure, with typical ranges. Your market will differ; the categories won't.
| Line | What goes in it | Example |
|---|---|---|
| Purchase price | Contract price. | $230,000 |
| Buy-side closing costs | Title, escrow, lender fees, points on hard money (commonly 1–3 points), inspection, appraisal. Typically 2–4% plus points. | $9,500 |
| Rehab | Scoped from a written bid, by trade, with materials priced. Not a per-square-foot guess. | $60,000 |
| Contingency | 10% of rehab minimum; 15–20% on older houses or anything with unopened walls. | $9,000 |
| Holding costs | Per month: property taxes, insurance (vacant/builder's risk, which costs more than a homeowner policy), utilities, HOA, lawn and security. Multiply by the full timeline: rehab plus listing plus days on market plus closing. Six months is normal; three is optimistic. | $900/mo × 6 = $5,400 |
| Financing cost | Interest on the loan for the full holding period. Hard money at 10–12% interest-only on $200,000 is $1,700–$2,000 a month. Add any draw fees and the exit or extension fees in the loan docs. | $11,000 |
| Selling costs | Commissions (commonly 5–6% total, though negotiable), seller-paid closing costs, transfer taxes, concessions, staging, a home warranty. Plan on 7–8% all-in, not 5%. | $30,000 |
| Total cost | $354,900 | |
| Projected profit | ARV minus total cost. | $45,100 |
Run the same deal with three months of holding instead of six, 5% to sell instead of 7.5%, and no contingency, and "profit" jumps to about $72,000. That's the spreadsheet that got someone excited. The $45,000 version is the one that happens.
Profit in dollars isn't enough on its own. Run both:
If either test fails at the conservative ARV, walk. The deals that lose money are almost never the ones that looked bad on paper. They're the ones that looked fine with an optimistic ARV and a three-month timeline.
From flip books I've closed, in rough order of how often they were missing from the original analysis:
Flip profit is ordinary income, not capital gain, for most people doing it as a business, and it's usually subject to self-employment tax. That's a 30–45% haircut on the profit line depending on your bracket, which is one more reason a thin deal isn't worth it. Run flips through an entity set up for the activity, keep each project's costs in its own job in the books, and capitalize the costs to the property until it sells. A flip isn't a rental: it's inventory. Your preparer will want the project cost ledger at year-end, and if you've been coding rehab to "repairs" on a P&L, that's a cleanup.
The controller's version of the 70% rule: if the deal needs the optimistic ARV, the short timeline, and no contingency to work, it doesn't work. Price every line conservatively, and let the good deals be obvious.
Flip analysis is the same discipline as any project costing: a budget, a job, and a comparison of estimate to actual when it closes. The job costing guide covers the QuickBooks side of tracking each property as its own job.
The Fix & Flip Deal Analyzer builds the complete analysis above: ARV from comps, rehab with contingency, holding and financing by the month, selling costs, both profit tests, and a conservative-versus-optimistic comparison so you can see which spreadsheet you're looking at.
A screening shortcut: maximum purchase price equals 70% of the after-repair value minus estimated rehab cost. The 30% is meant to cover holding, financing, selling costs, and profit. It's useful as a first filter and unreliable as a final analysis, especially on lower-priced properties and longer rehabs.
Use three to five sold comparables from the last 90 days, within about a half mile, with similar size and bed and bath count, renovated to the level you plan. Adjust for differences and use the low end of the adjusted range, not the average.
Property taxes, insurance (vacant or builder's risk, which costs more than a homeowner policy), utilities, HOA dues, lawn and security, and loan interest, all multiplied by the full timeline: rehab plus listing plus days on market plus closing. Six months is a realistic default.
Test two numbers: profit as a percentage of ARV, where most experienced flippers want 12–15% and below 10% is fragile, and annualized return on the cash actually invested. If either fails at a conservative ARV, the deal is too thin.
For most people flipping as a business, no. Flip profit is ordinary income and typically subject to self-employment tax. The property is inventory, so costs are capitalized to the project until sale. Confirm your situation with a tax preparer.
General guidance on analyzing a real estate project, not investment, tax, or legal advice. Cost ranges are illustrative; markets, lenders, and local taxes vary. Confirm financing terms with your lender and tax treatment with your preparer.
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