Understanding Fix and Flip Economics
Fix and flip investing is straightforward in concept: buy a distressed property, renovate it, and sell it for a profit. But the math behind a successful flip requires careful calculation of multiple cost layers. Missing even one line item can turn a profitable flip into a loss.
This guide walks through the profit formula, every cost category, and a complete example deal.
The Fix and Flip Profit Formula
Net Profit = Sale Price – Purchase Price – Rehab Costs – Holding Costs – Selling Costs
Or expressed another way:
Net Profit = ARV – Total Project Cost
Where Total Project Cost = Purchase + Rehab + Holding + Buying Costs + Selling Costs.
Breaking Down Each Cost
Purchase Price
The acquisition cost. Successful flippers typically buy at 65% to 75% of ARV minus rehab costs (the 70% rule). This leaves enough margin for profit after all expenses.
Rehab Costs
All renovation expenses: demolition, materials, labor, permits, dumpster rentals, inspections, and contingency (always add 10-15%). Get detailed contractor bids before closing on the purchase.
Holding Costs
Every month you own the property costs money:
- Hard money or private loan interest (10%-14% annually)
- Property taxes (prorated)
- Insurance
- Utilities during rehab
- HOA dues (if applicable)
- Loan origination points (1-3 points on the loan)
Buying Costs
Closing costs on the purchase: title insurance, escrow fees, attorney fees, inspection, and appraisal. Budget 1% to 2% of purchase price.
Selling Costs
The largest exit cost is the real estate agent commission (typically 5% to 6% of sale price). Add seller closing costs (1% to 2%), staging, photography, and any buyer concessions.
The 70% Rule
A quick screening formula used by experienced flippers:
Maximum Offer = (ARV x 70%) – Rehab Cost
If ARV is $300,000 and rehab is $40,000:
Max offer = ($300,000 x 0.70) – $40,000 = $170,000
This rule builds in enough margin for holding costs, selling costs, and profit.
Example Flip Deal
- Purchase price: $175,000
- Rehab: $45,000
- Holding costs (4 months): $8,000
- Buying closing costs: $3,500
- Total project cost: $231,500
- ARV / Sale price: $310,000
- Agent commission (5.5%): $17,050
- Seller closing costs: $4,650
- Total selling costs: $21,700
Net Profit: $310,000 – $231,500 – $21,700 = $56,800
ROI: $56,800 / $231,500 = 24.5%
Timeline: 4 months
Common Mistakes That Kill Profit
- Overestimating ARV. Use conservative comps. A 5% overestimate on a $300K property is $15,000 off your bottom line.
- Underestimating rehab. Get multiple bids and add contingency.
- Slow renovation timeline. Every extra month adds holding costs.
- Forgetting selling costs. Agent commissions alone consume 5-6% of the sale price.
Run Your Flip Numbers
Use our free fix and flip calculator to model any deal before you make an offer.
Try the FAAS Funding Fix & Flip Calculator