The most commonly-employed strategy for flipping homes (short-term ownership of real estate) is to fix and flip a rehab property. The investor finds a property for sale that needs repairs, buys it at a price well below the retail market value, assumes responsibility for making those repairs, and then resells the property to a homeowner at its retail value. It can generate a hefty profit, tens of thousands of dollars on a single property, but only if the investor thoroughly researches the cost of turning the home from a substandard shack to a picket-fence American dream-home.
Obviously, that’s an exaggeration of what you’ll be doing as a rehabber, which in all likelihood is going to be nothing more intensive than updating some systems, repairing the roof, painting, and so forth. But it gives you the sense that the transformation to make the home suitable for retail is going to cost time and money, and you need to approach the initial deal cognizant of that. You make the profit on the day you buy the property, not on the day you sell it. Which means you need to accurately account for the cost of repair, ownership, and resale.
Let’s just address the cost of repairs. Always overestimate, or you will eat away your profit. First, before you buy anything, make a thorough assessment of the house in which you literally check every inch of every room. Write down everything that needs to be replaced, modified, repaired, or added. Write down everything! Every little detail you omit will be an unforeseen cost you incur later, and they will pile up. Take your list to a hardware store and find out exactly how much the materials will cost. Next, you must account for the labor cost to install all of the hardware, which unless you plan to do everything yourself will be about $1 for every $1 spent on materials. Finally, increase your total by about 20% to get a final estimation. This increase is for contingencies—if anything should happen that you didn’t predict, this will reduce the likelihood that your profits are eaten away. Whatever the final estimation is, round up to the nearest clean number.
If you can negotiate to buy the property at a price that, if added to your estimation of the cost of repairs, you think you can sell the house for, then you’ve found yourself a good deal. Don’t forget about the cost of selling and owning the house, and remember: you make your money at the point of purchase (not sale), so don’t just jump in with two feet every time you find a home listed below market value.