What the 70% rule actually assumes
The rule originated in markets with plentiful distressed inventory — foreclosures, estate sales, deferred-maintenance properties — where sellers were motivated enough to accept a steep discount. Under those conditions, "pay no more than 70% of ARV minus rehab" is a reasonable filter for leaving enough margin to cover holding costs, selling costs, and profit.
Where it breaks down
In markets where land value makes up a large share of a property's worth — much of coastal Canada, much of the US West Coast, and other high-demand metros — there usually isn't 30% of ARV worth of "distress" to capture in the first place. A well-located property in reasonable condition simply won't trade at a 30% discount to its finished value, no matter how good the renovation plan is. Applying the 70% rule strictly in these markets doesn't filter out bad deals; it filters out nearly everything, including deals that are genuinely profitable once you look at the actual numbers.
What to check instead
Three numbers give a fuller picture than a single purchase-price ceiling:
- Profit margin — net profit as a share of total project cost, not just the spread between purchase and sale price.
- Margin of safety — how far the after-repair value could fall before the deal breaks even. This answers the question the 70% rule is trying to get at (how much room for error exists) more directly than a fixed percentage of purchase price does.
- Cash-on-cash return — what the deal actually returns on the money put in, accounting for financing.
A deal that exceeds the 70% rule but still shows a healthy profit margin, a real safety cushion between ARV and break-even, and a solid cash-on-cash return isn't automatically a bad deal — it just doesn't fit a heuristic built for a different kind of market.
The rule still has a place
None of this means the 70% rule is useless — as a fast first-pass filter in markets where distressed inventory is common, it still does its job. The mistake is treating it as a universal pass/fail test rather than one data point among several, especially for investors evaluating deals across different regions.
Run your own flip numbers, free. CapShark scores your deal across 7 factors — profit margin, ROI, safety margin, holding period, the 70% rule, financing risk, and rehab risk — with hard caps so one great number can't hide a real weakness.
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