Why the 70% Rule Exists
Every successful real estate investor has a system for deciding the most they will pay for a property. Without a system, emotions take over. You start justifying higher prices because you "really want this deal" or because "the neighborhood is trending up." That is how investors lose money.
The 70% rule gives you a hard ceiling — a Maximum Allowable Offer (MAO) — that accounts for your profit margin, holding costs, and the inherent uncertainty of estimating repairs and resale value.
Breaking Down the Math
Let's walk through a real example using numbers you might see on a Texas Signals property listing.
The Property:
•After Repair Value (ARV): $250,000
•Estimated Repair Costs: $35,000
The Calculation:
•Step 1: $250,000 x 0.70 = $175,000
•Step 2: $175,000 - $35,000 = $140,000 (Your Maximum Offer)
Where Does Your Equity Come From?
This is where many new investors get confused. Your $140,000 offer on a $250,000 ARV property gives you a 44% total discount from ARV — not just 30%. Here's why:
•30% comes from the 70% rule itself — you are only paying 70 cents on the dollar for the property's future value. That 30% covers your profit margin, closing costs, holding costs, and a buffer for the unexpected.
•An additional 14% comes from the repair costs — the $35,000 in repairs represents another $35K/$250K = 14% discount. You are buying a property that needs work, and the market rewards you for taking on that risk and effort.
The total: 30% + 14% = 44% built-in equity at your purchase price.
When to Adjust the Percentage
The 70% is a starting point, not a commandment. Experienced investors adjust based on:
Use 65% (Conservative) When:
•You are new to investing and still learning to estimate repairs
•The property is in a declining or uncertain market
•The rehab is extensive (structural, foundation, mold)
•You plan to wholesale and need room for your buyer's profit too
•The ARV estimate is based on limited comps
Use 70% (Standard) When:
•You have reliable repair estimates from a contractor
•The property is in a stable market with good comp data
•You are flipping and have done similar projects before
•Holding costs are predictable (you have a reliable lender)
Use 75% (Aggressive) When:
•You are buying in a rapidly appreciating market (e.g., Austin suburbs 2020-2024)
•The rehab is cosmetic only (paint, flooring, fixtures)
•You are a contractor and can do the work at cost
•You have strong comp data supporting the ARV
•You are buying and holding (rental income offsets some risk)
How Repair Costs Change Everything
New investors often focus only on the percentage and overlook how dramatically repair costs affect the deal. Let's compare three scenarios on the same $250,000 ARV property:
Scenario A: Cosmetic Rehab ($10,000)
•MAO = $250K x 70% - $10K = $165,000
•Equity: ($250K - $165K) / $250K = 34%
Scenario B: Moderate Rehab ($35,000)
•MAO = $250K x 70% - $35K = $140,000
•Equity: ($250K - $140K) / $250K = 44%
Scenario C: Heavy Rehab ($75,000)
•MAO = $250K x 70% - $75K = $100,000
•Equity: ($250K - $100K) / $250K = 60%
Notice how Scenario C gives you 60% equity, but you are also taking on $75K of rehab risk. If the roof replacement costs $15K more than expected, or you discover knob-and-tube wiring behind the walls, your actual profit shrinks quickly.
Common Mistakes with the 70% Rule
Mistake 1: Using Zillow Zestimates as ARV
Zestimates are automated valuations based on tax records and algorithm guesses. They can be off by 10-20% or more, especially for distressed properties. Always use actual comparable sales (closed within 90 days, within 0.5 miles, similar size and condition).
Mistake 2: Forgetting Holding Costs
The 70% rule assumes you sell within 3-6 months. If your flip takes 9 months, you are paying an extra 3-6 months of loan interest, insurance, taxes, and utilities. On a $140K purchase with hard money at 12%, that is roughly $1,400/month in interest alone.
Mistake 3: Ignoring Closing Costs
You pay closing costs twice — when you buy and when you sell. Budget 1-2% on the buy side and 3-4% on the sell side (including title, escrow, and transfer taxes). On a $250K sale, that is $7,500-10,000.
Mistake 4: Not Adjusting for Wholesale
If you are wholesaling, you need to calculate the MAO for your end buyer, not yourself. Your end buyer needs the 70% rule to work for them. Then your wholesale fee comes on top. Example:
•End buyer's MAO: $140,000
•Your wholesale fee: $10,000
•Your MAO: $130,000
Using the Texas Signals MAO Calculator
Texas Signals includes a built-in Deal Analyzer that combines ARV estimation, MAO calculation, and wholesale fee calculation in one tool. Here is how to use it:
1.Enter your comp sales — find 3 recently sold comparable properties and enter their sale prices
2.Set the subject square footage — the calculator derives a $/sqft ARV
3.Enter your repair estimate — get this from a contractor walk-through, not from guessing
4.Choose your rule percentage — 65% conservative, 70% standard, 75% aggressive
5.See your Max Offer — along with a clear breakdown showing where your equity comes from
What About the 1% Rule and Cap Rate?
The 70% rule is for flips and wholesale deals. If you are buying and holding as a rental, you need different metrics:
•The 1% Rule: Monthly rent should be at least 1% of the purchase price. A $200K property should rent for $2,000/month.
•Cap Rate: Net Operating Income / Purchase Price. A 6-8% cap rate is typical for Texas metro areas.
•Cash-on-Cash Return: Annual cash flow / total cash invested. Aim for 8-12% minimum.
Texas Signals has dedicated Rental ROI and DSCR calculators in the Investment Calculators tool — check them out if you are evaluating buy-and-hold deals.
Quick Reference
•MAO = ARV x Rule% - Repairs
•Standard rule: 70% (adjust 65-75% based on experience and risk)
•Equity margin = (ARV - MAO) / ARV (should be 30%+ for flips)
•Always get contractor bids before finalizing repair estimates
•Account for holding costs — interest, insurance, taxes, utilities
•Wholesale adjustment — subtract your fee from the end buyer's MAO
•Use real comps — closed sales within 90 days and 0.5 miles
Ready to run the numbers on a real property? Head to the Investment Calculators in the left sidebar, or browse Texas Signals' pre-foreclosure listings to find your next deal.