The 70% Rule Explained: How to Never Overpay for a Property

Why the 70% Rule Exists

The 70% Rule is the single most important formula in real estate investing. It tells you the maximum you should pay for a property based on its After Repair Value (ARV), estimated repairs, and your desired profit margin. Break this rule, and you're gambling. Follow it, and you're building a business.

The Formula: MAO = ARV × 0.70 - Estimated Repairs

That's it. Three numbers. One calculation. Every deal decision you ever make starts here.

Breaking Down Each Component

After Repair Value (ARV)

ARV is what the property will be worth after all renovations are complete. This isn't a guess — it's computed from comparable sales (comps) in the area. To find accurate ARV:

• Pull 3-5 comps within 0.5 miles that sold in the last 6 months
• Match comps by: square footage (within 20%), bedrooms, bathrooms, property type, condition
• Adjust for differences — a comp with a garage when your property has none needs a downward adjustment
• Average your adjusted comps = your ARV

Pro tip: Always be conservative. If your comps suggest an ARV between $180K and $210K, use $180K. The deal either works at the conservative number or it doesn't work.

Estimated Repairs

Repair estimates require either a contractor walkthrough or experience-based computation. Common repair costs:

• Light cosmetic (paint, carpet, fixtures): $10-15/sqft
• Medium rehab (kitchen, bathrooms, flooring, paint): $20-30/sqft
• Full gut renovation (structural, mechanical, everything): $40-60/sqft

A 1,200 sqft property needing a medium rehab: 1,200 × $25 = $30,000 in repairs.

Always add a 10-15% contingency buffer. Surprises happen — foundation cracks, mold, outdated electrical panels. Budget for them.

Real-World Examples

Example 1: Light Rehab Flip

• ARV: $175,000
• Repairs: $18,000
• MAO = $175,000 × 0.70 - $18,000 = $104,500

If you buy at $104,500, spend $18K on repairs, your total investment is $122,500. Sell at $175K minus closing costs ($10K), your gross profit is approximately $42,500.

Example 2: Heavy Rehab

• ARV: $250,000
• Repairs: $65,000
• MAO = $250,000 × 0.70 - $65,000 = $110,000

Total investment: $175,000. Sell at $250K minus $15K closing costs = $60,000 gross profit. The heavier the rehab, the more margin you need.

Example 3: Wholesale Deal

• ARV: $200,000
• Repairs: $30,000
• Wholesale fee desired: $15,000
• MAO = $200,000 × 0.70 - $30,000 - $15,000 = $95,000

You contract at $95K, assign to a buyer at $110K, collect $15K at closing without ever touching the property.

When to Use 65% Instead of 70%

The 70% Rule is your baseline. In certain situations, drop to 65%:

• Hot markets where properties move fast and competition drives prices up — you need more margin because you might hold longer
• Properties over $300K ARV — higher price points have higher carrying costs and thinner buyer pools
• Full gut renovations — more unknowns mean more risk
• Your first 5 deals — until you have experience, build in extra margin

Common Mistakes

1. Using Zillow estimates as ARV — these are automated and often inaccurate. Always use actual comp sales.
2. Underestimating repairs — the #1 reason investors lose money. When in doubt, overestimate.
3. Ignoring holding costs — every month you hold a property costs money (mortgage, insurance, taxes, utilities). Factor this into your analysis.
4. Emotional attachment — you love the property and convince yourself the numbers work. They don't. Move on.

The Bottom Line

The 70% Rule is your deal-or-no-deal filter. Run every single property through this formula before making an offer. Be conservative on ARV, generous on repairs, and disciplined on your margin. The investors who consistently make money are the ones who consistently follow the numbers.