Key takeaways
- Selling costs, financing, and holding expenses commonly consume 15% to 20% of ARV.
- The 70% rule is a fast screen, not underwriting — verify with a full cost model.
- Flip profit is ordinary income, often subject to self-employment tax, not capital gains.
- Time on market is the variable most often underestimated.
Where the money actually goes
New flippers model purchase, rehab, and sale price, then treat the difference as profit. The difference is gross margin. Between it and net profit sit buy-side closing costs, loan points, monthly interest, property taxes, insurance, utilities, and sell-side closing costs including commission — which alone typically runs 5% to 8% of sale price.
On a $385,000 ARV, sell-side costs of 7% are about $27,000 before anything else. Add points and six months of hard money interest on a $260,000 loan and you are past $45,000 of cost that never appears in a naive spreadsheet. Model the full stack in our house flip calculator.
The 70% rule and what it hides
The rule says maximum offer equals 70% of ARV minus rehab cost. It is a screening filter designed to leave room for costs and profit. It works reasonably in markets with moderate prices and standard commission structures.
It breaks in expensive markets, where 30% of a $900,000 ARV overstates required margin, and in cheap markets, where fixed costs consume a larger share of a small spread. Use it to reject deals quickly, then underwrite line by line the ones that pass.
Contractors and scope discipline
Get itemized bids from at least three licensed contractors and require a written scope of work with a payment schedule tied to milestones. Never prepay materially ahead of completed work. Verify licensing and insurance directly with the state, not from a certificate the contractor hands you.
Scope creep is the enemy. Every upgrade must justify itself against ARV, and ARV is set by comparable sales, not by finish quality. Quartz in a neighborhood of laminate does not raise the ceiling; it lowers your margin.
Tax treatment nobody warns you about
Flips held as inventory produce ordinary income, not long-term capital gains, regardless of holding period. Active flippers are typically treated as dealers, meaning profits face ordinary rates plus self-employment tax, and Section 1031 exchanges are unavailable because inventory does not qualify.
Set aside for taxes as you go and structure the business deliberately with a CPA before your second flip. See our tax guides for the broader framework.
Frequently asked questions
How much profit should I target per flip?
Most experienced flippers underwrite to a minimum net profit floor — often $30,000 to $50,000 — rather than a percentage, because fixed costs do not scale down on small deals.
How long should a flip take?
Light cosmetic flips run 8 to 14 weeks including sale. Full gut renovations run six months or more. Permit timelines are the least predictable input.
Is flipping better than renting?
Different businesses. Flipping is active income with taxable events and no depreciation. Renting is slower, more passive, and considerably more tax-favored.
Sources & further reading
- ATTOM Data Solutions home flipping reports
- IRS Publication 334, Tax Guide for Small Business
- National Association of Home Builders remodeling cost surveys
Figures and rules change. Verify current requirements with the issuing agency or a licensed professional before acting.