Investment Math
& Rules of Thumb

The 70% Rule

The 70% Rule is the foundational heuristic for fix-and-flip investing. Pay no more than 70% of After Repair Value minus repair costs:

MAO = (ARV × 0.70) − Repair Costs

On a $200,000 ARV with $30,000 in repairs, maximum allowable offer is $110,000. The 30% spread between purchase and ARV absorbs selling costs (6–10%), holding costs (taxes, interest, insurance, utilities for 4–8 months), acquisition costs, and profit (target 10–20% of ARV).

Where the 70% Rule breaks:

• Hot markets — when bidding pushes prices to 75–80% of ARV, the rule must bend or the investor sits on the sidelines. Professionals extend to 75% only if repair estimates are well-bounded and the market is appreciating.
• High-end flips — a 70% multiplier on a $1M ARV leaves $300,000 of spread, which is large in absolute dollars even at 75% or 80%. Higher-end deals tolerate looser multipliers because the absolute margin is still healthy.
• Uncertain repairs — if repair estimates are rough, drop the multiplier to 65% to absorb variance. Auction bidders routinely use 60–65% because they cannot inspect interiors.

Veteran flippers treat 70% as the default and move up or down based on ARV confidence, market momentum, and repair uncertainty — never all three tailwinds at once.

Maximum Allowable Offer (MAO)

MAO is the 70% Rule’s more precise sibling. Instead of burying holding, selling, and profit inside a single 30% buffer, MAO lists each line item explicitly:

MAO = ARV
    − Repair Costs
    − Holding Costs (interest + taxes + insurance + utilities × months)
    − Selling Costs (8–10% of ARV)
    − Desired Profit (10–20% of ARV)
    − Acquisition Costs (auction fees, title, closing)

Worked example. $300,000 ARV, $45,000 repairs, $9,000 holding (6 months at 1.5% of ARV per month), $24,000 selling (8%), $30,000 profit target (10%), $3,000 acquisition:

MAO = $300,000 − $45,000 − $9,000 − $24,000 − $30,000 − $3,000
    = $189,000

Note this is meaningfully higher than the 70% Rule’s $165,000 MAO on the same deal. That’s because MAO line-items the real costs rather than burying them in a blanket 30% haircut. Either way works; professionals run both and take the lower number as their actual cap.

After Repair Value (ARV)

ARV is the single most abused number in foreclosure investing. Every formula above is only as accurate as the ARV that feeds it. Professional ARV is not a Zestimate — it is a market-specific comparable-sales analysis that mirrors what a residential appraiser would do:

1. Pull 3 to 6 sold comparables within a 0.5-mile radius, same property class, sold within the last 90 days
2. Match on bedrooms, bathrooms, living area (within 10%), and year built (within 10 years)
3. Adjust each comp for feature differences: $40–60/sq ft for size, plus/minus 10–20% for condition, specific dollar amounts for garage, lot size, pool, view
4. Average the adjusted comps; apply a 5% buffer in cooling markets

Experienced flippers drive the comps. They look at the school zone, the neighborhood cycle, the street-level quality. They weight sold comps over active listings by 5–10%, because active listings are asking prices, not clearing prices.

Algorithmic estimates — Zestimate, Redfin Estimate, the AVMs baked into MLS tools — have error bands that professionals trust about as far as they can throw them. AVMs undervalue unique post-rehab upgrades (an ADU, a legalized basement unit) and overvalue in softening markets where recent sales reflect stale demand. Pros cross-check AVMs against at least three manually selected comps, and when the two diverge by more than 5%, trust the manual comps.

The single most expensive mistake in foreclosure investing is an ARV pulled from an active listing that eventually sells for 8% less. That 8% vanishes straight from profit.

Cap Rate

Capitalization rate measures a property’s stabilized yield for buy-and-hold investors:

Cap Rate = Net Operating Income ÷ Purchase Price

NOI = Gross Rental Income
    − Vacancy (5–10%)
    − Property Taxes
    − Insurance
    − Maintenance (5–10%)
    − Property Management (8–10%)
    − Other operating expenses

Note: NOI excludes mortgage debt service. Cap rate is a leverage-neutral measure of the asset itself, not the investor’s returns on it.

Reasonable targets vary by market and property class:

• Core urban rentals — 4–6%
• Suburban single-family rentals — 6–8%
• Distressed single-family value-add — 8–12%
• Small multifamily distressed — 9–14%
• Tertiary markets / C-class — 10–15%

Buy-and-hold investors back into purchase price from a target cap rate: if stabilized NOI is $24,000 and the target cap is 10%, max purchase is $240,000. Cap rate is the primary tool for pricing rental acquisitions; it’s unreliable for flips because flips don’t stabilize.

Cash-on-Cash Return

Cash-on-cash measures the pre-tax yield on actual cash invested, after debt service:

Cash-on-Cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested

Cash Flow = NOI − Debt Service
Cash Invested = Down Payment + Closing Costs + Rehab

Example. $150,000 acquisition, 20% down ($30,000) plus $5,000 closing plus $20,000 rehab = $55,000 cash in. NOI $18,000, debt service $9,600 = $8,400 cash flow. Cash-on-cash = $8,400 / $55,000 = 15.3%.

Targets are investor-dependent but 12–20% is the common professional floor for leveraged buy-and-hold. Below 10%, the deal is usually a speculation on appreciation rather than a cash-flow investment.

Debt Service Coverage Ratio (DSCR)

DSCR is the lender’s view of your deal, not the investor’s. It measures the property’s ability to service its debt from operating cash flow:

DSCR = NOI ÷ Annual Debt Service

DSCR loans — a dominant non-QM product for investor rentals — typically require DSCR ≥ 1.25 for approval, with better pricing at 1.35 or above. A property with $24,000 NOI and $16,000 annual debt service runs 1.50 DSCR, which qualifies for best-pricing tiers.

Pros stress-test DSCR at 90% occupancy and 10–15% higher expenses than pro forma, because that’s roughly what the lender will do in underwriting. A deal that hits 1.50 DSCR on optimistic numbers can drop to 1.10 under stress — which is a denial.

Internal Rate of Return (IRR)

IRR discounts all cash flows — initial outlay, monthly cash flow, eventual sale — to the annualized rate that makes net present value zero. It’s the standard metric for deals longer than 12 months or with irregular cash flows.

Excel handles this natively with =IRR(range). For a typical distressed flip: −$165,000 at purchase (including rehab), zero or minimal cash flow during the rehab, then +$210,000 net at sale 6 months later. The IRR comes out around 54% annualized. Flips that run 12+ months see IRR drop dramatically because the annualization is real.

Targets: professional flippers want annualized IRR above 30% to justify the risk. Buy-and-hold on stabilized rentals expects IRR in the 15–25% range once rent growth and eventual appreciation are factored in.

The 1% Rule and the 2% Rule

The 1% Rule is a rental-screening heuristic: monthly gross rent should be at least 1% of the purchase price. A $200,000 rental should command $2,000/month or more.

The 2% Rule is the stricter version used in deep value-add or tertiary-market plays — monthly rent at 2% of purchase price. A $75,000 acquisition commanding $1,500/month hits the 2% Rule. In most US urban markets, the 2% Rule is effectively unreachable without substantial value-add.

These are screeners, not deal decisions. They catch overpriced deals at a glance but don’t factor taxes, insurance, management, vacancy, or repair reserves. Pros use them to quickly dismiss non-starters — not to underwrite.

Gross Rent Multiplier (GRM)

GRM is the simplest rental valuation metric:

GRM = Purchase Price ÷ Annual Gross Rent

Lower is better for the buyer. A $240,000 property with $30,000 annual gross rent has a GRM of 8.0, which is strong. GRM above 15 generally indicates the property is priced for appreciation rather than cash flow.

GRM ignores operating expenses entirely, so it’s a first-pass screening metric. A property with a great GRM and terrible expense load (old roof, deferred maintenance, high property taxes) can still be a bad deal. Use GRM alongside cap rate, not in place of it.

Operating Expense Ratio and Reserves

Operating Expense Ratio (OER) is expenses as a percentage of effective gross income. For stabilized single-family rentals, 35–45% is typical. For small multifamily with heavier management, 45–55%. For distressed assets during stabilization, budget OER at 50–60%.

A professional OER underwrite includes:

• Property taxes — 20–30% of operating costs in most markets
• Insurance — 8–12%, higher in coastal / disaster-prone areas
• Property management — 8–10% of gross rent if outsourced
• Maintenance and repairs — 5–10% of gross rent
• Vacancy reserve — 5–10% of gross rent
• Capital expenditure reserve — 5–10% of gross rent
• Utilities (if owner-paid) — varies
• HOA or condo association dues — varies

New investors routinely underestimate CapEx reserves. A $5,000 roof, $6,000 HVAC, and $4,000 water heater can blow a year of cash flow. Veterans budget $250–500 per unit per year for CapEx in addition to maintenance.

LTV, LTC, and ARV-LTV

Three loan-to-value variants show up in foreclosure underwriting, and confusing them is how investors end up short on closing:

• LTV — loan divided by current (as-is) appraised value. Conventional investor loans cap at 75–80% LTV; DSCR loans similar.
• LTC — loan divided by total project cost (purchase plus rehab). Fix- and-flip lenders typically fund 80–90% LTC.
• ARV-LTV — loan divided by post-rehab ARV. Fix-and-flip lenders also cap at 65–75% ARV-LTV as a second constraint.

A typical fix-and-flip loan will fund “the lesser of 90% LTC or 70% ARV-LTV.” On a $200,000 purchase with $50,000 rehab and $350,000 ARV, that’s the lesser of:

• 90% × ($200,000 + $50,000) = $225,000 LTC
• 70% × $350,000 = $245,000 ARV-LTV

Loan amount: $225,000 (the lesser). Investor brings $25,000 plus closing costs. Running the numbers as if ARV-LTV is the binding constraint — when LTC actually is — leaves the investor short at the closing table.

The auction back-of-envelope

At a live auction, investors don’t have time for full spreadsheets. The mental math pros actually use:

1. Pull three recent sold comps from the comps app; average dollars-per-square-foot; multiply by subject size; apply 5% haircut for auction risk. That’s your ARV.
2. Repairs by tier: $30–50/sq ft for cosmetic, $60–100/sq ft for heavy. Add $20,000 fixed if roof or HVAC look bad from the street. Sight-unseen interior = add 20%.
3. MAO = ARV × 0.65 − Repairs − $5,000 buffer for auction premium, carrying, and surprise costs.
4. Profit test: will (ARV × 0.10) cover everything above your expected sale costs? If not, pass.

A 1,800 sq ft property with $220/sq ft comps gives ARV $396,000. Repairs at $50/sq ft = $90,000. MAO = $396,000 × 0.65 − $90,000 = $167,000. If live bidding passes $167,000, walk away. This is the discipline that separates profitable auction bidders from the ones who learn expensive lessons.

Common pitfalls

• Inflated ARV. Using active listings instead of sold comps adds 5–15% of false ARV. At scale, this is the #1 cause of flip losses.
• Lowball repair estimates. Contractors routinely bid 20–30% under actual cost. Anchoring on a single bid is dangerous. Pros take three bids and pad by 20%.
• Ignoring carrying costs. Carrying costs run roughly 1.5–2% of ARV per month when financed. A 9-month flip on a $300,000 ARV eats $40,000+ that new investors don’t model.
• Over-leveraging. Running at 90% LTC and 75% ARV-LTV leaves no margin for ARV decline or repair overrun. Pros keep cash reserves of 10–20% of project cost outside the loan.
• Confusing pro forma with reality. Pro forma assumes full occupancy, model expenses, and the rent you hope to charge. Actual Year 1 NOI is often 70–80% of pro forma. Model stabilized Year 2–3 numbers for underwriting, not hopeful Year 1.
• Skipping the reserve line. A property with great cash flow and no reserves is a property one dead HVAC away from negative cash flow. 5% of gross rent to CapEx reserve, minimum.