Flipping is the most visible real estate strategy and the least forgiving. The margin lives entirely in the gap between what you pay plus what you spend and what the finished property sells for — and that gap is consumed by a set of costs that are easy to underestimate and impossible to avoid. The projects that fail rarely fail on the renovation. They fail on the arithmetic done before the purchase.
The cost structure that actually decides it
Purchase price and rehab are the obvious two. The ones that eat margin: acquisition financing, typically hard money at double-digit rates plus two to four points; holding costs across the whole project — interest, taxes, insurance, utilities; selling costs of 6–8% including commission and transfer taxes; and a contingency, because scope grows on nearly every project. On a $400,000 resale, those non-obvious costs commonly total $50,000–$70,000.
Screening with the 70% rule
The standard filter is maximum offer = (ARV × 0.70) − rehab. It is a screen rather than an underwrite, and the 30% haircut has to cover everything above. See the 70% rule for where it is too loose — high transfer-tax states, slow markets, expensive money, and low price points all compress it. Screen with it; decide with a real line-item model.
ARV is the number that ruins projects
After repair value is an estimate of a future sale in a market that has not happened yet, and every other figure is measured against it. Build it from closed sales of comparable renovated properties within three to six months and half a mile, at today’s prices, with no assumed appreciation. Then stress-test the deal at 90% of that number. If it only works at your best case, it does not work.
Time is the cost nobody budgets properly
Every additional month is interest, taxes, insurance and utilities against a property producing nothing. A project planned for four months that takes eight does not lose half the margin — it can lose all of it, because the fixed costs accrue while the resale price does not move. Permit delays, contractor scheduling and material lead times are the usual culprits, and all three are more predictable than people treat them.
The alternative exit worth keeping open
If the market softens or the property does not sell at your number, the fallback is to rent it and refinance out of the hard money into a long-term loan — a BRRRR rather than a flip. That option only exists if the property would actually cover a mortgage at prevailing rents, so check the DSCR on the purchase even when you intend to sell. Knowing before you buy whether the fallback is available is worth more than any single renovation decision.
Fix and Flip FAQ
Many investors target a minimum dollar profit rather than a percentage, because fixed costs do not scale down on small deals. The figure should reflect your capital cost and the risk of the specific project.
Four to nine months from purchase to closing, including renovation, listing and escrow. Budget holding costs for the full period, not just the construction.
Mostly hard money or fix-and-flip loans sized against ARV, with a rehab holdback released in draws. Conventional lenders generally will not lend on uninhabitable property.
Short-held flips are generally taxed as ordinary income rather than at long-term capital gains rates, and frequent flipping can be treated as a trade or business. Worth discussing with a CPA before your first one.
An optimistic ARV, followed closely by an underestimated rehab budget and an overrun timeline. The renovation itself is rarely the problem.
Often yes — rent it and refinance the hard money into a DSCR loan. That exit only works if the property covers the payment, so check coverage before purchase.