What rehab padding are you using on flips right now?

Question

One thing I’m seeing investors underestimate right now is rehab padding.

A property can look like a clean cosmetic flip, but once you factor in holding costs, lender fees, insurance, utilities, permits, and surprise repairs, the spread can shrink fast.

My rule of thumb:

If the numbers only work when everything goes perfectly, it’s probably not a deal.

For those actively flipping right now, how much are you padding your rehab budget before you feel comfortable moving forward?

Are you using a flat dollar amount, a percentage, or just adjusting based on the scope of work?

Richard Golding · Answer

Using a generic percentage for rehab padding is how rookie investors bleed out their margins. A flat ten percent contingency means absolutely nothing if you are dealing with a structural asset versus a cosmetic refresh.

You need to split your padding into two distinct categories. For cosmetic items like carpet paint and cabinets you can run a tight ten percent buffer because the material volume and labor hours are predictable. But the moment you touch the hidden infrastructure like structural framing mechanical systems or underground utilities you drop the percentage model entirely. You price those line items at worst case retail bids and then slap a heavy twenty five percent variance directly on the structural subtotal.

The other silent killer is your carrying cost padding. Most flippers budget their hard money interest and utilities based on a perfect construction schedule. You should automatically add sixty days of holding time to your underwriting math before you even look at the purchase price. That extra two months of carry covers the city permit delays the backordered materials and the appraisal lag when you go to sell.

If the deal cannot absorb that dual layer buffer while still hitting your target equity spread you leave the asset alone. True padding isn't a hopeful number you add at the bottom of a spreadsheet it is a structural discount you force into your initial purchase offer.

Bo Smith · Answer

I'm using 15-20% on top of contractor estimates as my standard contingency now, but honestly that's the minimum bar. The bigger variable is whether I'm padding my ARV assumption and my holding cost estimate. If I'm only padding the rehab line and being optimistic everywhere else, I'm still setting myself up to miss.

The real test is stress-testing the entire deal at once. I'll take my contractor estimate, add 20% to rehab, then add 25% to my holding costs, and subtract 5% from my ARV. If the deal still pencils and hits my target margin, then it's actually a deal. If the margin gets thin at those stress-tested numbers, I pass. Every dollar of contingency I build in is buying me insurance against the chaos that always shows up mid-project.

A property that looks like a "clean cosmetic flip" on paper is often anything but once the drywall comes down. That's where the big money surprises come from -- hidden electrical issues, plumbing rot, structural problems, mold in the crawlspace. I've learned to add even more padding on "light" rehabs because those are the ones that fool you. If the scope looks heavier and the risks are obvious, I'm less surprised when costs run.

Are you building contingency into the rehab line only, or are you also stress-testing your ARV and holding cost assumptions?