The Fix-and-Flip Model, Explained

Flipping looks simple on TV: buy low, renovate, sell high. In reality, the profit is made when you buy — and the math is unforgiving. Here's the model.

The flip cycle

   FIND  ──▶  ANALYZE  ──▶  FUND  ──▶  REHAB  ──▶  SELL
    │           │            │          │           │
 off-market   ARV +       hard money  scope +    stage +
 deals,       70% rule    or cash     timeline   price to
 auctions,                                        the comps
 wholesalers

The 70% rule (your first filter)

A common guardrail: don't pay more than 70% of the After-Repair Value (ARV), minus repair costs.

  Max Purchase Price = (ARV × 0.70) − Repair Costs

  Example:
    ARV (what it sells for fixed up) ....... $700,000
    × 0.70 ................................. $490,000
    − Estimated repairs ................... −$80,000
    ────────────────────────────────────────────────
    Max you should pay .................... $410,000

That 30% buffer absorbs your real costs: financing, holding, closing, and profit.

The costs beginners forget

• Financing — hard-money loans are fast but expensive (points + high interest).
• Holding costs — taxes, insurance, utilities, loan interest every month you own it.
• Selling costs — agent commissions, closing, and concessions.
• Overruns — assume the rehab costs more and takes longer than planned.

Deal-analysis checklist

• Pulled 3–5 recent comps to set a realistic ARV
• Got a contractor walkthrough and written repair bid
• Added a 10–20% contingency to the rehab budget
• Modeled holding costs for a realistic timeline (often 4–8 months)
• Confirmed financing terms (points, rate, draw schedule)
• Ran the deal at a lower sale price to stress-test the profit
• Checked permits required for the planned work

A quick profit sketch

  Sale price (ARV) ...................... $700,000
  − Purchase price ..................... −$410,000
  − Rehab .............................. −$80,000
  − Financing + holding ................ −$35,000
  − Selling costs (~6%) ................ −$42,000
  ──────────────────────────────────────────────
  Estimated profit ...................... $133,000

Change any input and the profit moves fast — which is why disciplined buying matters more than granite countertops.

Resources

• IRS — Tax on flipping (dealer vs. investor) — flips are often taxed as ordinary income
• CFPB — Understanding loan costs
• Local building department for permit requirements (Santa Clarita / LA County)

Flipping is an active business with real financial risk. Model conservatively and consult a CPA — profits are frequently taxed as ordinary income, not capital gains.