A rehab budget that lenders trust is built backward from the after-repair value — not forward from a contractor’s guess. Investors lose more money to thin budgets than to bad markets. The number you submit with your loan file decides your draw schedule, your carry time, and whether the deal was ever a deal. Sizing the rehab budget correctly is the first renovation the project needs.
Start at the ARV and work backward
Every flip or BRRRR begins with the after-repair value: what the finished property will sell or appraise for. From that ceiling, subtract your target profit, the purchase price, financing costs, and selling costs. Whatever remains is the most your renovation can cost. Many investors keep the old 70 percent rule as a sanity check — purchase plus rehab should stay near 70 percent of ARV — but the backward math is what actually protects you.
What a complete rehab budget includes
Underwriters read budgets every day, and they can spot a thin one in seconds. A fundable rehab budget covers four layers:
- Hard costs by trade: roof, HVAC, electrical, plumbing, kitchens, baths, flooring, paint — line by line, not one lump sum.
- Soft costs: permits, drawings, dumpsters, utilities during construction, and builder’s risk insurance.
- Contingency: 10 to 20 percent on top, higher for older homes — the line every first-time flipper deletes and every veteran defends.
- Carry costs: loan interest, taxes, insurance, and HOA dues for every month the project runs — plus the months it slips.
Match the budget to the scope of work
The budget and the scope of work must tell the same story. A cosmetic refresh — paint, flooring, fixtures — sits at one end. A gut renovation with new systems sits at the other, and each tier carries its own cost per square foot in your market. When the budget says cosmetic but the scope lists a new roof and rewiring, underwriters notice, appraisers notice, and the draw schedule breaks down mid-project. Price the scope with a contractor who has walked the property, then let the numbers — not optimism — set the tier.
How lenders fund the rehab
Bridge and fix-and-flip lenders rarely wire the renovation money at closing. The rehab budget funds in draws: you complete a stage, an inspector verifies it, and the lender reimburses that line. Owner-occupants have FHA’s 203(k) program for renovation loans; investors use bridge loans, where the draw schedule follows the exact budget you submitted — another reason the line items need to be real. Plan the exit before you start: if you will refinance and hold instead of selling, run the finished numbers through our DSCR calculator so the rent covers the payment at the new value.
A typical deal
An investor targets a tired three-bedroom in Lake Worth with an ARV of $400,000. Working backward — $60,000 target profit, $38,000 in financing, carry, and selling costs — she caps her all-in at $302,000 and wins the house at $246,000. Her scope of work prices at $49,000; she budgets $56,000 with contingency. The bridge loan funds 85 percent of the purchase and the full rehab in four inspected draws. A plumbing surprise eats $4,800 of the cushion, the flip still sells on schedule, and the profit lands within $3,000 of the original model.
Sizing up your next project?
Alpha Equity Lending finances fix-and-flip and bridge loans across Florida and reviews the rehab budget with you before the appraisal ever happens. Tell us about the property through our submit your deal page — in English or Spanish.
By Andres Jara — Alpha Equity Lending (NMLS #1855083). 20+ years in real estate finance, an MS in Finance, and an active South Florida investor and landlord.
