The 75% Rule
The 75% Rule
The 75% rule is a backstop: your total cash invested (purchase price plus rehab) must not exceed 75% of the after-repair value.
Key takeaways
- The rule protects you from overpaying and over-rehabbing by enforcing a hard ceiling on total investment relative to ARV.
- The math: If ARV is $220,000, your purchase plus rehab must be under $165,000.
- The rule leaves a 25% margin that absorbs ARV forecast errors, appraisal shortfalls, and contingency costs.
- Many successful investors target 65–70%, not 75%, to create additional safety margin and cash-out potential.
- The rule is a deal qualifier, not a deal optimizer; if a property violates the rule, you renegotiate or walk.
Why 75% is the magic number
The 75% rule emerged from practical experience. If you invest exactly 75% of ARV and the property appraises at ARV post-rehab, a conventional lender will refinance at 80% LTV, returning a loan equal to 80% × ARV. Since your investment is 75% of ARV, the refinance proceeds cover your investment plus a small buffer.
Here is the math: ARV = $220,000. Your investment = 75% × $220,000 = $165,000. Conventional refinance at 80% LTV = 80% × $220,000 = $176,000. Net proceeds after retiring hard money = $176,000 − $165,000 = $11,000. You recover most of your capital and retain $11,000 on the table, or $0 if the appraisal is $10,000 lower (appraises at $210,000 instead of $220,000).
If you invest 85% of ARV, the math deteriorates. Investment = 85% × $220,000 = $187,000. Refinance proceeds = $176,000. You are short $11,000; the refinance doesn't fully retire hard money. You either inject more capital, accept a higher hard money balance into the long-term mortgage, or walk away from the deal.
The rule works because it forces discipline at the front end—the hardest part of any BRRRR deal is the purchase price and the rehab estimate. Once these are locked, the rest (rental income, refinance timing, tenant quality) is more controllable.
Applying the rule: a case study
You find a property in a Phoenix neighborhood. Comparable sales and income analysis support a $240,000 ARV. The seller's asking price is $165,000. The property needs $45,000 in rehab: new roof, HVAC, flooring, updated kitchen, exterior paint.
Does it satisfy the 75% rule?
$165,000 (purchase) + $45,000 (rehab) = $210,000 total investment.
$210,000 ÷ $240,000 = 87.5%.
The deal violates the rule. You are investing 87.5% of ARV, leaving only 12.5% margin. The appraisal could come in 10–12% lower (at $210,000–215,000) and you would have zero equity recovery. More importantly, the 80% LTV refinance would cover only $192,000; hard money is $165,000 + carrying costs, so you cannot fully retire it.
You have three options:
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Renegotiate the purchase price down to $155,000. New investment: $155,000 + $45,000 = $200,000. Ratio: 83.3%. Still tight, but defensible.
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Challenge the rehab estimate. Obtain a second contractor quote; maybe the roof can be deferred or cosmetic work trimmed. If rehab drops to $40,000, total investment is $205,000 (85.4%)—still above 75% but closer.
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Walk. If the seller won't budge and rehab estimates are firm, the deal fails the litmus test. Another deal will come along with better math.
Disciplined investors choose option 3 frequently. The confidence that comes from striking a deal at 70–72% of ARV is worth more than the temporary excitement of a deal at 84%. Properties that barely meet the rule are fragile; one appraisal surprise or cost overrun cascades into financial stress.
Accounting for contingency and unknowns
The 75% rule assumes your ARV estimate is accurate and your rehab budget is tight. In practice, both have error margins. A conservative approach is to treat contingency as part of the investment cap.
If your hard-cost estimate is $45,000 and you typically see 15% contingency burn, budget $51,750. Include this in the 75% calculation.
$165,000 (purchase) + $51,750 (rehab with contingency) = $216,750. Ratio: 90.3% of $240,000. Now the deal clearly violates the rule; a $155,000 purchase price is mandatory.
By front-loading contingency into the 75% test, you avoid the trap of hitting the rule on hard costs but then discovering additional rehab needs post-closing that push you over.
Targeting 65–70% instead of 75%
Many experienced investors use 65–70% as their target, not 75%. This is deliberate conservatism that provides additional benefits.
At 70% of ARV, your investment is $154,000 (using the $220,000 example). The 80% LTV refinance returns $176,000. Net proceeds: $22,000. Now you have actual cash back in your pocket after paying off hard money. This cash can accelerate the next deal or beef up reserves.
At 65% of ARV, investment is $143,000. Refinance returns $176,000. Net proceeds: $33,000. This is transformative for scaling. Over five deals, you recover $165,000 of new capital—enough to fund the down payment on Property 6 via cash savings alone.
The 70% target also survives more appraisal variance. If the property appraises 10% lower ($198,000 instead of $220,000), the 80% LTV refinance returns $158,400. Your 70% investment was $154,000; you still recover cash and close out hard money. At 75%, the same appraisal surprise would trap you.
The 75% rule in different market conditions
In slow-appreciation markets (Rust Belt, secondary cities), the 75% rule is often achievable because purchase prices are inherently below ARV. In hot appreciation markets (Austin, Denver, Florida markets in 2022–2023), the rule is harder to hit because prices are bid up to ARV quickly. This is not a reason to abandon the rule; it is a signal that the market is frothy and deal flow should be selective.
In recession periods, distressed inventory is abundant and the rule is easy to hit. In bull markets, deals that satisfy the rule are rarer, but they do exist if you are patient and willing to target secondary properties or neighborhoods.
Negotiation mechanics: using the 75% rule as a tool
When you submit an offer, the 75% rule provides a rational anchor. If the seller is asking $165,000 and your rehab estimate is $45,000, your offer is $160,000. When the seller counters at $162,000, you push back: "$160,000 is my max because $162,000 + $45,000 exceeds the 75% rule—at that price, the deal doesn't pencil."
This frame is powerful. It signals that you are not making an emotional or arbitrary decision; you are following a proven model. Sophisticated sellers and agents understand the 75% rule and respect the discipline. Unsophisticated sellers may not, but your offer is still grounded in a defensible principle.
In wholesale deals, where wholesalers assign contracts to you for a fee, the 75% rule determines whether a deal is worth assuming. A wholesaler offers to assign a deal: Purchase price $150,000, after-repair value $210,000, rehab $40,000. Your investment = $190,000. Ratio = 90.5%. The deal fails the rule. The wholesaler may ask $3,000–5,000 for the assignment; declining the deal is rational because the numbers don't work, regardless of the assignment fee.
Common violations and fixes
The price negotiation fails: You aimed for $160,000 but seller holds at $168,000. Your rehab is $40,000. Investment = $208,000 on a $240,000 ARV (86.7%). Fix: Walk or re-run the numbers with a lower ARV if new comps support it.
The rehab estimate balloons: First contractor quote was $40,000. Second opinion is $48,000. Third is $45,000. Average is $44,300. Investment = $160,000 + $44,300 = $204,300 (85.1%). Fix: Negotiate purchase price down to $155,000, bringing investment to $199,300 (83%).
You underestimate ARV: Comps looked strong at $240,000 when you made the offer. One month later, a comparable property sold for $215,000 in as-is condition; post-rehab, it might be $230,000. You recalculate; ARV is $230,000, not $240,000. Your investment is $204,300 ÷ $230,000 = 88.8%. Fix: Acknowledge the error, lower your ARV to $220,000 conservative, and re-evaluate whether to proceed. The deal is deteriorating; consider walking.
The rule as a risk filter
The 75% rule is not a one-size-fits-all formula; it is a risk filter. Deals that satisfy the rule have survived a basic sanity check. Deals that violate the rule have absorbed either optimistic assumptions or uncontrolled costs. By enforcing the rule rigorously, you avoid the tail-risk disasters—deals where an appraisal surprise, cost overrun, or market decline leaves you with negative equity and no path to capital recovery.
Decision framework
Related concepts
Next
Once you understand the 75% rule, you need to find deals that satisfy it. The next article covers where to source properties—MLS listings, off-market deals, wholesalers, and auctions—and how to evaluate deal flow in competitive markets.