A flip looks easy on a napkin: buy for $168,000, put in $42,000, sell for $289,000, and $79,000 is left over. About half of that never reaches you. Loan fees, interest, property taxes, insurance and selling costs all come out first. This walkthrough follows one deal from purchase to sale so you can see where each dollar goes. All figures are pre-tax, meaning before any income tax on the profit.
The deal
- Purchase price: $168,000
- Rehab budget: $42,000
- Expected sale price, also called the after-repair value (ARV): $289,000
- Time from purchase to sale: 5 months
- Property taxes of $2,600 a year and insurance of $1,500 a year
- Selling costs: 7% of the sale price
Step 1: size the hard-money loan
This example uses a hard-money loan with 15% down on the purchase, the rehab funded by the lender, 11% interest-only payments and 2 points. Terms vary by lender, so swap in your own quote.
Loan = ($168,000 purchase minus $25,200 down payment) + $42,000 rehab = $142,800 + $42,000 = $184,800
In this example, three costs come out of your pocket at purchase:
- Down payment, 15% of $168,000: $25,200
- Points, 2% of the $184,800 loan: $3,696
- Purchase closing costs, assumed here at 3% of $168,000: $5,040
Step 2: add up holding costs
With an interest-only loan you typically pay only interest each month and repay the full balance when you sell.
Monthly interest = $184,800 × 11% ÷ 12 = $1,694
- Loan payments over 5 months: $8,470
- Property taxes and insurance over 5 months: $1,708
- Total holding costs: $10,178
Step 3: subtract selling costs
Selling costs = 7% × $289,000 = $20,230
This bucket commonly covers agent commissions and seller-side closing costs. The percentage varies by market and by what you negotiate.
Step 4: net profit and return on cash
Total project cost = $168,000 + $42,000 + $5,040 + $3,696 + $10,178 + $20,230 = $249,144
Net profit = $289,000 sale price minus $249,144 total project cost = $39,856
That profit is 13.8% of the sale price. Your own cash in the deal is much smaller than the project cost. The lender covers most of the purchase and all of the rehab, and selling costs come out of the sale proceeds.
Cash needed = $25,200 + $5,040 + $3,696 + $10,178 = $44,114
Return on cash = $39,856 ÷ $44,114 = 90.3%
Scaled to a full year, that is 217%. Treat the annualized figure as a way to compare deals of different lengths, not a forecast. It only holds if you could repeat the same flip back to back with no gaps.
Step 5: check the 70% rule
The 70% rule is a quick screen: pay no more than 70% of ARV, minus repairs.
Maximum offer = 70% × $289,000 minus $42,000 = $202,300 minus $42,000 = $160,300
This deal fails the rule. The $168,000 purchase price is $7,700 above the $160,300 maximum offer.
So why does the full analysis still show a profit? The rule holds back $86,700 of the ARV for every cost besides repairs, plus your profit. It does not know what your costs really are. This deal leaves $79,000 between the ARV and the purchase plus rehab, which is $7,700 less than the rule wants. Closing costs, points, holding costs and selling costs take $39,144 of that, and the remaining $39,856 is the profit.
Failing the rule does not by itself mean a deal loses money. It means the margin is thinner than the rule wants, so the next two steps matter more.
Step 6: find the break-even sale price
The break-even sale price is $246,144. It sits below the $249,144 total project cost because the 7% selling costs shrink as the price drops. The cushion is $42,856: the house can sell for that much less than $289,000 before you lose money.
Step 7: run three stress tests
- Sale price 5% lower, at $274,550: net profit falls to $26,417.
- Rehab 20% over budget, at $50,400: net profit falls to $30,903. The drop is larger than the $8,400 overrun because the extra rehab is borrowed, which adds points and interest.
- 8 months instead of 5: net profit falls to $33,749. Each extra month adds another $1,694 of interest, plus taxes and insurance.
Each test on its own still leaves a profit, and the lower sale price hurts the most. But problems often arrive together. A rehab that runs over budget often runs long too, so test the combinations in the calculator before you make an offer.
What this analysis leaves out
- Income taxes. Every figure here is pre-tax. What you keep depends on your own situation, which is a question for a tax professional.
- The ARV itself. Every result above depends on the $289,000 sale price. Base it on recent comparable sales, not on hope.
- Rehab draws. This example treats the full loan as outstanding from day one. Many lenders release rehab money in stages after the work is inspected, so you may have to front some costs yourself.
- Other carrying costs. Holding costs here are loan payments, property taxes and insurance only. Utilities, lawn care, staging and a contingency for surprises are not included.
Run your own numbers
Change any input in the fix and flip calculator, screen offers quickly with the 70% rule calculator, and pressure-test your sale price with the ARV calculator.