Rehab Budget
The total estimated cost to renovate a property — hard costs, soft costs, and contingency. The rehab budget feeds the 70% rule, the ARV appraisal, and the rehab portion of a fix-and-flip loan.
A rehab budget is the total estimated cost to renovate a property, from demolition through final finishes. It's one of the two big numbers in any flip or BRRRR deal (the other being ARV), and getting it right is the difference between a profitable project and a money pit.
What a complete rehab budget includes
A real rehab budget is more than a guess at materials — it's the sum of several layers:
- Hard costs — materials and labor that physically go into the property (the bulk).
- Soft costs — permits, design fees, and (sometimes tracked separately) financing and carrying costs.
- Contingency — a 10–20% reserve for surprises.
A defensible budget is built from a detailed scope of work with real contractor bids, not round-number estimates.
How the rehab budget drives the deal
The rehab budget flows into every other part of the analysis:
- The 70% rule / MAO. Your max offer = (ARV × 0.70) − rehab budget. A bigger rehab budget means a lower offer you can afford to make.
- The loan size. On a fix-and-flip loan, the lender funds the rehab budget (often up to 100% of it) via a draw schedule, capped against ARV and loan-to-cost.
- The ARV appraisal. The subject-to appraisal values the property as if the rehab (per your scope) is complete.
A worked example
| Component | Amount |
|---|---|
| Hard costs (materials + labor) | $42,000 |
| Soft costs (permits, design) | $4,000 |
| Contingency (15% of hard) | $6,300 |
| Total rehab budget | ~$52,300 |
Underwriting to ~$52,300 — not the bare $42,000 of hard costs — is what keeps the deal honest.
Why investors get it wrong
The rehab budget is where optimism kills deals. Common mistakes:
- Estimating hard costs only, forgetting soft and carrying costs.
- No contingency, so the first surprise blows the budget.
- Guessing instead of bidding — actual contractor quotes are far more reliable than per-square-foot rules of thumb, especially on older or heavily distressed properties.
- Ignoring time — a longer project piles on financing and holding soft costs.
Practical takeaway
Build your rehab budget bottom-up from a detailed scope of work, add a real contingency, include soft and carrying costs, and then run it through the 70% rule against a conservative ARV. A budget built this way protects your margin and matches how the lender will fund the deal. A flip's profit is decided before you ever swing a hammer — in the accuracy of the rehab budget and the ARV.
Frequently asked questions
What should a rehab budget include?
Hard costs (materials and labor), soft costs (permits, design, and sometimes financing and carrying costs), and a contingency reserve of 10–20% for surprises. Build it from a detailed scope of work with real contractor bids rather than round-number guesses, so it reflects what the project will actually cost.
How does the rehab budget affect my maximum offer?
Directly. Under the 70% rule, your maximum allowable offer equals (ARV × 0.70) minus your rehab budget. A larger rehab budget lowers the price you can afford to pay. That's why an accurate budget is essential — underestimate it and you'll overpay; pad it sensibly and you protect your margin.
Will my lender fund the entire rehab budget?
Often most or all of it. Many fix-and-flip lenders fund up to 100% of the rehab budget through a draw schedule, releasing funds as work is completed and inspected — subject to the overall ARV and loan-to-cost caps. You typically front the first phase and get reimbursed via the first draw.