I was looking at a flip scenario recently that looked great at first, Purchase price worked. ARV made sense. Financing wasn't the problem, Then the rehab estimate changed.
Not by some crazy amount either. Just enough that what looked like a comfortable deal suddenly had a much thinner margin.
It got me thinking about how experienced investors underwrite renovations today. Material and labor costs can move, contractors miss things, and once walls start opening up, surprises happen.
For the flippers here: how much cushion are you adding to your rehab budget before you feel comfortable closing?
10%? 15%? 20%+?
And has that number changed for you over the last couple of years?
Delray Beach, FL · Member since 2024 · 22 posts · 11 votes
6d
For me, the percentage alone doesn’t tell the whole story. I’d probably start around 10% on a property where the scope is clear, but I’d want 20% or more if it’s an older house, there are signs of deferred maintenance, or I can’t fully inspect major systems before closing.
I also separate “known rehab” from “unknown risk.” If I know the roof, HVAC, kitchen, and flooring all need to be replaced, those should already be priced into the base budget. The contingency is really for the things you don’t know yet like electrical behind the walls, plumbing issues, subfloor damage, foundation surprises, permit-related work, or contractor change orders.
The other thing I look at is whether the deal still makes sense after the contingency is actually used. If the projected profit only looks good because I’m assuming I won’t touch the reserve, then the margin is probably too thin.
And yes, I’ve become more conservative over time. Not necessarily because every rehab is dramatically more expensive, but because labor, materials, timelines, and holding costs can all move at the same time.
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
6d
Frankie, I wouldn’t use one flat contingency percentage for every flip. The right cushion should move with the age of the property, how invasive the rehab is, how much is hidden behind walls, and how many trades are involved.
For a newer property with mostly cosmetic work, 5%–10% may be enough. For an older house where you’re touching plumbing, electrical, foundation, roof, or opening walls, I’d be much more comfortable in the 15%–25% range.
I also like separating known risks from true contingency. If you already suspect foundation, sewer, electrical, or HVAC issues, those should be line items in the rehab budget, not buried inside the contingency.
And I’d stress-test more than just rehab. A flip can get hit twice: the scope grows and the project takes 60–90 days longer than expected. So I’d keep carrying-cost reserves separate from construction contingency.
From the tax side, flips are generally active business activity, so I’d keep all acquisition, rehab, financing, and carrying costs tracked cleanly by project. If flipping becomes consistent and profitable, I’d also evaluate whether an S-Corp makes sense based on profit level, activity volume, payroll requirements, and reasonable compensation.
If you combine the flip business with rental real estate, there can also be a powerful tax-planning opportunity. Depending on participation, depreciation, entity structure, and whether the rental losses are usable, those losses may sometimes offset active real estate income. In the right fact pattern, taxable income can potentially be reduced very significantly, even to zero, but it has to be planned correctly.
Feel free to DM me, I’d be happy to send over a few resources that might help with flip underwriting and downside planning.
For myself typically when I'm running numbers I like to slightly inflate each individual line item by a couple hundred dollars and the on top of that add about a 10-15% contingency. This is slightly more than I had been doing in the past but this mainly is to account for the rising costs coupled with the fluctuating market. This gives me enough of a buffer in my deals to take hits on rehab overages.
I’d rather see a deal underwritten with a 15–20% rehab contingency than have the numbers look great on paper and fall apart once work starts. The older the property or the more unknowns involved, the more cushion I’d want.
I also think having access to backup capital matters. A business line of credit or other business funding can give an investor some flexibility when unexpected rehab costs come up without having to scramble for money mid-project. Either way, the deal still has to make sense after adding that cushion.
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