House Flipping: A Contractor's Guide to the Real Numbers

House flipping is a real business with real margins — when done correctly. It is not a weekend hobby or a way to make quick money without experience. This guide covers how professional flippers underwrite deals, what costs most beginners miss, and why the 70% rule exists.

The Actual Margin on a Flip

Let's start with real numbers. On a deal that goes according to plan:

Example deal:

• After-repair value (ARV): $400,000
• Purchase price: $210,000
• Rehab cost: $65,000
• Holding costs (6 months): $18,000
• Closing costs in + out: $20,000
• Total all-in: $313,000
• Gross profit: $87,000

That's a 22% margin on ARV — a solid flip by most market standards. But here's what can turn that $87,000 into $30,000 or a loss:

• Rehab runs $20,000 over budget (missed scope): $65K becomes $85K
• Market shifts during the hold: ARV drops to $370,000
• Holding period extends to 10 months: $18K becomes $30K
• Buyer financing falls through, second showing cycle: 2 more months holding

On the bad scenario: all-in goes to $350,000+, ARV is $370,000. You made $20,000 before taxes on 10 months of risk and capital. Or worse, you didn't.

This is why experienced flippers are conservative on ARV and conservative on rehab cost — the upside is capped and the downside is not.

The 70% Rule

The 70% rule is a quick filter, not a complete underwriting model: don't pay more than 70% of ARV minus repair costs.

Formula: Maximum Purchase Price = (ARV x 0.70) - Rehab Costs

On the example above: ($400,000 x 0.70) - $65,000 = $215,000. The deal at $210,000 passes the filter.

The 70% threshold leaves roughly 30% for all costs and profit — holding, financing, closing, commissions, and margin. In high-cost markets or slow-moving markets, some flippers use 65%. In fast markets with low rehab cost properties, 75% may work. The rule is calibrated for typical market conditions; adjust for yours.

Rehab Costs: Where Beginners Get Destroyed

The single biggest reason flippers lose money is underestimating rehab cost. This happens because:

Scope gaps. You see a bathroom that needs updating. You don't see the subfloor rot behind the toilet, the galvanized plumbing that needs replacement, and the electrical that's not up to code. A $5,000 bathroom becomes $18,000.

Deferred maintenance the inspection missed. Roof with 2 years of life left. HVAC on its last season. Foundation crack that's been caulked over for years.

Change orders. Even if you wrote a scope, contractors find things once walls open. Budget 10–15% contingency as a non-negotiable line item — not as money you hope not to spend.

Pricing without a site visit. Getting a rehab quote over the phone or from photos produces a number that is not a real budget. Any experienced GC or investor who hasn't walked the property doesn't know what the rehab costs.

The fix: Get your rehab estimate from a licensed contractor who has physically walked every room, attic, crawl space, and mechanical system. Then add 15% contingency. If that number still makes the deal work, proceed.

Holding Costs: The Silent Margin Killer

Every month you own the property costs money whether or not anyone is working on it:

On a 6-month flip, that's $16,000–$20,000. On a 10-month flip, it's $27,000–$34,000. Every month of delay is $3,000 off your bottom line. This is why timeline management isn't optional — it's financial management.

Financing: Hard Money vs. Private vs. Cash

Hard money loans are short-term asset-based loans from private lenders — 60–75% of ARV, 10–14% interest, 2–4 points upfront, 6–12 month terms. Widely available, fast to close, expensive to carry. Standard for first-time flippers without established relationships.

Private money is capital from individual investors — friends, family, local investors — at negotiated rates. Typically cheaper than hard money (8–10%), more flexible terms, relationship-dependent. As you build a track record, private money becomes accessible.

Cash is the cheapest hold cost (no interest) but ties up capital entirely. Cash flippers need enough volume to keep returns per dollar of capital competitive — typically 3+ flips per year per dollar of capital deployed.

Most beginning flippers use hard money for the first 2–3 deals, then transition to private money as they establish a track record.

The Three Numbers Every Deal Needs

Before you make any offer on a flip:

1. ARV — After-Repair Value. Run comps yourself: sold in the last 90 days, within half a mile, similar size and bed/bath count, similar condition post-renovation. Then get a second opinion from a local agent. Be conservative — don't use the best comp, use the median.

2. Rehab Cost. Walk the property with a contractor. Get a line-item estimate. Add 15% contingency.

3. Days on Market. How fast does inventory move in this price range in this zip code? A market where homes at ARV sell in 7 days is a different risk profile than one where they sit for 90. This affects your holding cost estimate and your exit confidence.

If you can't establish all three numbers with confidence, don't make an offer.

What TV Gets Wrong

Renovation reality shows compress timelines, understate costs, and ignore financing. A 6-week flip shown on TV took 4–6 months in reality. The "profit" number shown never accounts for financing costs, carrying costs, agent commissions, or the value of the hosts' own labor. The numbers are entertainment, not underwriting models.

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Working on your first or next flip and want a licensed GC's review of your rehab scope and budget before you close? Schneider Construction and Development offers remote scope review and bid analysis available nationwide — email hello@schneidercondev.com.