Why Most Rehab Budgets Underestimate by 30%

The pattern

The post-mortem on a failed flip almost always reveals the same root cause: the rehab budget was 25–35% too low. Not because the investor lied to themselves — because the way most people scope a rehab misses the same five categories every time.

Miss 1: Soft costs aren't a line item

Permits, dumpster, port-a-john, temporary power, deep clean, debris haul, lockboxes, signage. Each one is small. Combined they're $3,000–$6,000 on a typical 2-flat rehab. Most underwriting templates have zero line items for soft costs.

Fix

Add a dedicated "Permits + Misc" line for 4–7% of total hard rehab cost.

Miss 2: Contingency is set at 8% instead of 12–15%

Pre-1940 Chicago housing stock — most of the south and west side — hides issues that you can't see on a walkthrough: galvanized supply lines, knob-and-tube wiring above ceilings, foundation cracks behind drywall, asbestos mastic under vinyl tile.

Fix

Use 12% contingency on anything pre-1980. Use 15% on anything pre-1940. The Renovation tab in Prop-Folio defaults to 10% — bump it up.

Miss 3: Labor goes up between bid and start

You get a contractor bid in February for a project starting in May. By May, the contractor's other jobs are running over, materials prices have moved 4–6%, and the bid gets "updated." Always.

Fix

Add a 5% inflation cushion if there's more than 90 days between bid and project start.

Miss 4: Change orders aren't budgeted

You open up a wall to run new electrical and find a leaking drain pipe. You demo a kitchen floor and find a sagging joist. Change orders are a feature, not a bug. They will happen.

Fix

Expect 2–4 change orders per project totaling 5–8% of original scope. Build it into contingency.

Miss 5: Holding costs extend

The 6-month rehab takes 8 months. Hard money interest, property tax, insurance, utilities, debt service on your acquisition loan — every month over plan compounds. Two extra months on a $215k purchase + $80k rehab project at 11% hard money is roughly $4,600 in extra carry.

Fix

Underwrite to a 6-month rehab but stress-test at 8. If the math still works at 8, the deal is robust. If not, the deal needs a different financing structure or smaller scope.

How Prop-Folio surfaces all of this

Renovation tab has 12 categories with realistic tier-based ranges and a configurable contingency slider
Carry cost is computed from your hard money structure and stress-tested against your timeline
Sensitivity: bump contingency from 8% to 15% and watch the Deal Score change in real time

The fast rule

Take your contractor's first bid. Add 30%. If the deal still works at that number, the deal is real. If it doesn't, walk away — or scope it down.

Stress-test your rehab budget →