Guide
The 70% rule, honestly
Google asks about the 70% rule more than almost anything else in this category. It is two different things wearing one name, and only one of them is a rule you should follow.
"What is the 70% rule for hard money loans?" appeared in the People Also Ask box on seven of the ten hard money queries we sampled. It is the most asked question in the category, and it is almost always answered in two sentences that skip the part that matters.
The rule: do not put more than 70% of a property's after-repair value into it. Maximum offer = (ARV x 0.70) - rehab budget.
It is actually two different rules
- The lender's cap
- Most hard money lenders will not let total debt exceed 70% of ARV. This is a real, binding underwriting constraint. It is not advice to you - it is the limit on how much they will lend, set to protect their downside. It is also usually the constraint that decides your cash requirement.
- The investor's screen
- A rule of thumb for deciding whether a deal is worth analysing at all. The 30% gap is supposed to absorb your selling costs, carrying costs, financing costs and profit. Four things, one number, no arithmetic.
Conflating them is where people get hurt. Passing the lender's cap does not mean the deal works. It means the lender is protected.
Where the 30% actually goes
On a $400,000 ARV, 30% is $120,000. Here is a realistic allocation on a leveraged flip:
| Item | Amount | Share of the 30% |
|---|---|---|
| Selling costs at 8.0% | $32,000 | 27% |
| Cost of financing (7 months, leveraged) | $24,000 | 20% |
| Carrying costs (7 months) | $4,550 | 4% |
| Buy-side closing costs | $4,400 | 4% |
| What is left for profit | $55,050 | 46% |
That is a workable outcome. Now change three things that change on real deals: the project takes ten months instead of seven, the ARV comes in at $370,000, and the rehab runs 15% over. The profit is gone and you are working for the lender.
Why the rule fails specifically on leveraged deals
The 70% rule was formulated by cash buyers. A cash buyer's 30% gap covers selling costs, carrying costs and profit - three things. Add financing and you have added a fourth claim on the same fixed pot, and it is not a small one: on a leveraged flip the cost of money is commonly the second-largest line after the rehab itself.
What to use instead
Work backwards from the profit you require rather than forwards from a percentage:
- Start with a defensible ARV. Comparable sold properties, adjusted, in the last six months.
- Subtract selling costs at 8.0% of ARV.
- Subtract the rehab budget, scoped by line item, plus a contingency of at least 10%.
- Subtract carrying costs for the honest hold time, including marketing time.
- Subtract the real cost of financing from the true-cost calculator.
- Subtract the profit you actually require to justify the risk.
- What remains is your maximum offer, and it includes your buy-side closing costs.
When the rule is fine
As a thirty-second screen on a listing you are deciding whether to walk through, it is excellent. That is what a rule of thumb is for. The failure mode is using it as the underwriting rather than as the filter that decides what gets underwritten.
Questions people actually ask
What is the 70% rule for hard money loans?
The rule of thumb that you should not have more than 70% of a property's after-repair value tied up in it - so your maximum offer is (ARV x 0.70) minus the rehab budget. On a $400,000 ARV with $60,000 of rehab, that is $220,000.
Two things worth separating, because they get conflated constantly. As a lender cap, 70% of ARV is a real underwriting limit most hard money lenders apply, and it is the binding constraint on how much they will lend you. As an investor rule, the 30% gap is meant to absorb your holding costs, selling costs, financing costs and profit - all four - which on a leveraged deal it frequently does not. The rule is a screening filter, not an underwriting model. Run the real numbers.
What is the 2% rule for refinancing?
There is no established 2% rule for refinancing; the questioner is probably reaching for the old 2% rent-to-price rule of thumb (monthly rent of at least 2% of purchase price), which has been unattainable in most US markets for years. For a refinance exit the number that actually governs is DSCR - the ratio of rental income to the new loan's payment, taxes, insurance and HOA. Most rental lenders want 1.20 or better. Check yours.
What is a fix n flip loan?
A hard money loan structured for a buy-renovate-sell project: a purchase piece funded at closing, a rehab piece held back and released against completed work, interest-only payments, and a 12-month term timed to your renovation and resale.
What is the best loan for a fix and flip?
Whichever one has the lowest all-in cost for the months you will actually hold it, given the leverage you need. That is genuinely the answer, and it is not the same lender for every deal.
The structural things that decide it: whether interest accrues on the drawn balance or the full facility, whether there is a minimum-interest period, how many draws and at what fee, and what the extension costs. A lender quoting 11.5% on drawn balance with no minimum interest routinely beats one quoting 9.99% on the full facility with six months guaranteed.
Are fix and flip loans worth it?
They are worth it when the leverage lets you run more deals than your cash would, and the spread survives the financing cost with room left for the rehab running over. They are not worth it when the financing cost consumes a spread that was thin to begin with - which is most deals bought at retail. The financing is rarely what kills a flip; the purchase price usually already did.
How much money do I need for a fix and flip?
Plan on the down payment (10%-20% of purchase), plus points and flat fees, plus buy-side closing costs, plus the first rehab draw funded out of pocket, plus carrying costs for the whole hold, plus a genuine contingency. On a $250,000 purchase with $50,000 of rehab that is commonly $60,000-$80,000 of real cash, not the $25,000 the down payment alone implies.