The 70% rule and BRRRR, explained with a worked deal

Two pieces of shorthand dominate every fix-and-flip conversation: the 70% rule, which claims to tell you the most you can pay for a property, and BRRRR, which claims you can buy rentals and pull your cash back out to buy the next one. Both are real, both are useful, and both get repeated far more often than they get computed. Here's what each one actually does, worked on a sample deal — including the part the shorthand hides: this deal fails the 70% rule and still makes money.

The 70% rule: a screen, not a verdict

The rule is one line of arithmetic. Take the ARV — after-repair value, what the property should sell for once renovated — multiply by 70%, subtract the rehab cost, and that's your MAO, the maximum allowable offer:

Sample deal: a house with an ARV of $290,000 needing $44,000 of rehab. The rule says MAO = $203,000 − $44,000 = $159,000. If the seller wants $185,000, the deal fails the screen by $26,000, and the shorthand crowd moves on.

Here's the part worth understanding: run that same deal through a full model — actual purchase and selling costs, actual holding months, actual financing — and it can still clear roughly $21,900 of net profit, around 44% annualized on the cash in it. That's not a contradiction; it's what the rule is for. The 70% haircut is calibrated to leave a fat safety margin, so it rejects thin-but-real deals in ordinary markets and nearly everything in expensive ones (where flippers quietly use 75–80%). The reverse failure is worse: a deal can pass the screen and still lose money if the rehab number you fed it was a guess that grows 40% once the walls are open. So use the rule the way it was meant: a ten-second filter for sorting a stack of listings — never the final answer on the one you're about to offer on. The final answer comes from the full subtraction, with every cost named.

BRRRR: the same house, the other exit

BRRRR — buy, rehab, rent, refinance, repeat — takes the identical purchase and rehab and chooses a different ending: instead of selling the renovated house, you rent it out and do a cash-out refinance against its new value. The refinance is the whole trick. A lender will typically loan up to some percentage of the appraised value — say 75% LTV (loan-to-value). On our $290,000 ARV that's a new loan of $217,500, which pays off your original financing and hands the rest back to you in cash. The scoreboard number is what's left behind:

• Cash left in the deal — everything you put in (down payment, rehab, holding, closing) minus everything the refinance returned. On the sample deal it's about $33,860. Get this number low enough and the same pile of cash buys house after house — that's the "repeat."
• Monthly cash flow — rent minus the new mortgage payment (about $1,521/mo here — how a payment like that splits between interest and principal is its own short read) minus taxes, insurance, and honest allowances for vacancy, repairs, and management. Sample: about $188/mo. Positive, not princely — typical of a BRRRR that returns most of your cash.
• Cash-on-cash return — annual cash flow ÷ cash left in: $2,256 ÷ $33,860 ≈ 6.7%. This is the honest yardstick for a BRRRR, because it measures the return on the money still trapped in the deal, not on money the refinance already gave back.

Flip and BRRRR aren't rivals; they're two prices for the same asset. The flip pays you once, now, and you're out. The BRRRR pays you slowly, keeps the house (and its tenants, screened properly), and leaves you exposed to the appraisal coming in low or rates moving your payment. Which is why the useful move isn't picking a camp — it's running both exits on the same inputs and letting the deal tell you what it is:

The number that decides everything: the rehab

Notice that both formulas eat the same fragile input. The 70% rule subtracts the rehab; the BRRRR's cash-left-in swallows it whole. And rehab is the number most investors guess — a per-square-foot rumor, a contractor's parking-lot estimate, a hopeful round number. The fix is to estimate it the way a builder does: line by line, by construction division — demo, roof, plumbing, electrical, HVAC, kitchen, baths, finishes — with a contingency percentage on top, because opened walls always have opinions. A division-by-division budget is also the first thing that tells you a "cosmetic flip" is secretly a systems job, which is the discovery you want to make before closing, not after.

Three honest cautions before you trust any of it

1. ARV is the most dangerous number in the model. Every output above leans on $290,000 being real. Pull true comparables — same neighborhood, similar size and condition, sold recently — and be the pessimist; a 5% miss on ARV is a $14,500 swing that lands entirely on your margin.
2. The rule's percentage is a local dial, not a law. 70% is a habit from markets with room in them. Investors work 75–80% in expensive metros and tighter than 70% on rough properties. Know what the number is doing (reserving selling costs, holding costs, and margin) and you'll know when to adjust it.
3. Model the boring drag. Vacancy, repairs, management, the months of holding costs while the rehab runs long — the line items that don't fit in shorthand are the ones that quietly decide the deal. If the deal only works with zero vacancy and a perfect appraisal, it doesn't work.

And the caveat that isn't fine print: this is arithmetic, not advice. A calculator can tell you what a deal returns under your assumptions; whether to buy a property — with your market, your financing, your risk — is a judgment call the spreadsheet can't make. What it can do is make sure the judgment is made on the full subtraction instead of a slogan. Know the number before you make the offer.