Rehab Budget Analysis and Draw Underwriting

A professional rehab budget is organized by category with line-item detail. Major categories include demolition and site prep, structural and framing, electrical, plumbing, HVAC, roofing, windows and doors, kitchen (cabinets, counters, appliances), bathrooms, flooring, interior paint, exterior work, landscaping, and contingency. Each line item should include a description, material cost, labor cost, and total. Lenders expect budgets in the range of $15-$40 per square foot for cosmetic renovations and $40-$80+ per square foot for full gut rehabs, depending on the market and property condition.

When a borrower requests a draw, the lender dispatches an inspector to verify that the claimed work has been completed to an acceptable standard. The inspector photographs the work and provides a percentage-of-completion assessment. Lenders release funds only for verified completed work—if a borrower claims 50% of electrical is complete but the inspector determines it is only 30%, the draw is reduced accordingly. This verification process protects the lender but creates cash flow timing challenges for investors who must fund work in advance of reimbursement.

Every rehab budget should include a 10-20% contingency for unforeseen issues. Common budget-busting surprises include hidden water damage, termite damage behind walls, knob-and-tube or aluminum wiring requiring full electrical replacement, cast iron plumbing failures, foundation issues, and asbestos or lead paint remediation. Some lenders include contingency in the loan; others require the borrower to demonstrate liquid reserves to cover potential overruns. Having insufficient contingency is the second most common cause of fix-and-flip project failure, after ARV overestimation.