Flipping profit is not sale price minus purchase price. Between those two numbers sit closing costs, renovation, holding costs, and selling costs, and forgetting any one of them turns a winning deal into a losing one on paper after the fact. The full calculation has four stages.
Stage 1: total cost
Total cost = purchase price + purchase closing costs + renovation + holding costs + selling costs. Holding costs include mortgage interest, taxes, insurance, and utilities during the renovation and sale period. Selling costs include agent commission and seller closing costs.
Example: purchase $180,000, purchase closing $5,000, renovation $45,000, holding $8,000, selling $18,000. Total cost = $256,000.
Stage 2: profit and ROI
Net profit = sale price – total cost. With a sale price of $320,000: profit = $320,000 – $256,000 = $64,000. ROI = net profit / total cost x 100 = $64,000 / $256,000 x 100 = 25%. Some investors divide by purchase price instead, which gives a higher-looking 35.6%, but dividing by total cost is the honest version because it counts all the money you put in.
State your denominator whenever you quote ROI. Two flippers quoting different ROIs for the same deal are usually dividing by different numbers.
Stage 3: annualised return
A 25% ROI over 6 months is far better than 25% over 2 years. Annualised return adjusts for time: annualised ROI = (1 + ROI)^(12 / months) – 1. For 25% over 6 months: (1.25)^2 – 1 = 56.25% per year. Over 18 months: (1.25)^(12/18) – 1 = about 16%. Time is the hidden variable in flipping: a slow renovation eats return even when the final profit looks fine.
Annualised figures assume you can repeat the deal, which is optimistic. Use them to compare deals, not as a promise of yearly income.
The 70% rule
The 70% rule gives a maximum offer price: max offer = after-repair value (ARV) x 0.70 – renovation cost. For our example: $320,000 x 0.70 – $45,000 = $224,000 – $45,000 = $179,000. Our purchase price of $180,000 is just above that, which flags the deal as tight. The rule bakes in roughly 30% for costs and profit, and it is a screening tool, not a valuation: in high-cost or low-margin markets, adjust the percentage to fit local reality.
Financing a flip changes the ROI
Most flips use borrowed money, and the borrowing cost belongs in total cost. Hard-money loans are fast but expensive: a $180,000 loan at 12% annual interest for 6 months costs $10,800 in interest alone, before fees and points.
That $10,800 comes straight out of the $64,000 profit in our example, cutting it to $53,200 and ROI from 25% to about 20.8% on the same total cost base. Cheap financing is part of the deal, not a detail: a flip that works at 8% money can fail at 14%. Always run the ROI with your real financing cost, not with a cash-purchase fantasy.
A final cost that beginners miss: the cost of money while the property sits unsold. Every extra month on the market adds mortgage interest, taxes, insurance, and utilities to holding costs, while the sale price stays fixed. A flip budgeted for 4 months that takes 9 has roughly double the holding cost, which can erase the profit margin entirely even when the renovation went perfectly.
Try it faster with the tool
You can follow every step above by hand, but the free House Flipping ROI Calculator — Profit, ROI % and Annualised Return After Every Cost does the arithmetic for you. Enter your numbers and it gives the answer right away, so you can check your hand calculation or skip straight to the result.
Quick tips
- Profit = sale price – all costs, not just purchase price.
- ROI = profit / total cost x 100.
- Max offer = ARV x 0.70 – renovation cost.