Cash is king, but only if you buy smart. Here's how to protect your margins with one of real estate’s most important formulas.
When it comes to fix-and-flip properties — especially those acquired with all cash — I often hear a bit of confusion around financial terminology. One common mix-up? Investors mentioning RMDs (Required Minimum Distributions), which are strictly tied to retirement accounts like IRAs, when what they really need to focus on is the 70% Rule.
✅ What Is the 70% Rule?
The 70% Rule is a trusted benchmark used by real estate investors to calculate the maximum purchase price they should pay for a property they're planning to flip.
Formula:
(ARV × 70%) – Estimated Repair Costs = Maximum Purchase Price
- ARV (After Repair Value): What the home is expected to sell for after renovations
- Repair Costs: The total estimated expense for all improvements and upgrades
💡 Example:
Let’s say the ARV is $300,000, and you estimate $50,000 in renovation costs:
($300,000 × 0.70) – $50,000 = $210,000 – $50,000 = $160,000
That $160,000 becomes your target acquisition price to maintain profitability.
💰 Why It Matters for Cash Buyers
Even when you're making an all-cash offer, the 70% rule remains critical. That 30% margin isn't just for profit — it has to account for:
- Closing costs
- Holding costs (insurance, taxes, utilities)
- Realtor commissions
- Financing (if used later)
- Unexpected repairs
- And yes — your bottom-line profit
Going above that threshold without adjusting for market conditions or cost overruns? That’s how cash-rich investors find themselves cash-poor by closing day.
🔎 A Few Smart Considerations
- Market Flexibility: In competitive markets, some investors stretch to 75–80% of ARV, but this increases risk and compresses profit.
- Precision is Power: The 70% rule is a guideline, not a guarantee. Successful investors pair it with detailed market research and contractor input.
- Experience Counts: If you’re new to estimating repairs or local comps, consult a trusted real estate agent or contractor before writing that offer.
🧠 Final Takeaway
RMDs belong in your IRA conversation — not your flipping strategy. For real estate investments, especially flips funded with cash, the 70% Rule is your compass. Use it to protect your capital, streamline your numbers, and ensure you're walking into every deal with a clear path to profit.
💬 Have a deal you're analyzing or want a second opinion on a potential flip? Let’s connect — I’d be happy to run the numbers with you.
Tina Lucarelli - Global Real Estate Advisor - The ONE Luxury Properties, Inc. - (310) 738-8089 - [email protected]
DRE 02102354
