How to Make a Profit on Rehabbing a Home

by Sam Ashe-Edmunds, Demand Media
    House flipping success often depends on your pre-buy activities.

    House flipping success often depends on your pre-buy activities.

    Flipping a house for profit can be a risky venture for several reasons, including a poor property purchase, hidden problems with the house, lack of control over contractors and a sudden change in market conditions. Careful project planning and management can help you minimize many of these risks. Limiting your rehabbing to cosmetic improvements and doing as much of the work yourself will help you see bigger profits.

    Set a Budget

    Step 1

    Determine how much money you can spend on your flip. Include the purchase price, the money you will need for a down payment and closing costs and the money you will spend on renovations, repairs, extra insurance and permits.

    Step 2

    Calculate the carrying costs of the house, including monthly mortgage payments and interest if the project lasts for more than a few weeks. Include a 10 percent cost overrun for the project as a cushion.

    Step 3

    Determine the amount of money you can afford to lose on the project. Include the amount of cash you can afford to lose selling the house at a loss to get out of a failing project and the amount of monthly mortgage payments you can afford to continue to make if you cannot sell the house.

    Pre-Buy Research

    Step 1

    Write a list of factors that affect your ability to sell a house. Include such things as school district in which the house resides, property taxes, comparable home sale prices in the area, structural integrity, types of repairs or renovations needed and number of bedrooms and bathrooms.

    Step 2

    Hire a home inspection professional to evaluate homes that meet your criteria. Pay for a full inspection that includes a termite inspection and thorough examination of electrical and plumbing work, roof, foundation and code readiness.

    Step 3

    Decide what improvements you need to make to sell the house quickly and at the highest price. Price the cost of the renovations, including materials, labor and permits, working with a qualified contractor or contractors. Get contractors' bids in writing, including labor and material costs and deadlines. Determine the timeline for the project and how it will affect your carrying costs.

    Step 4

    Add up the purchase price of the house, your rehab costs and desired profit. Negotiate the lowest price you can for the house, setting a maximum price that lets you meet your desired profit. If the seller won't meet that price, walk away.

    Project Management

    Step 1

    Oversee the management of the rehab yourself, working daily with the contractor, unless you are performing the work yourself. Keep in close contact with suppliers to ensure your delivery times stay on schedule.

    Step 2

    Resist the temptation to make unnecessary renovations. Rehab the house for potential buyers, not yourself. Stay with neutral paint and carpet colors. Reface kitchen cabinets instead of purchasing new ones, if you can.

    Step 3

    Create a Plan B for scenarios that might interrupt your project. Have backup suppliers and a plan for replacing your contractor, if necessary. Check the delivery price and times of backup supplies shortly before each major component of your project is to be delivered in the event items such as appliances, carpet or tile fall through.

    Selling the House

    Step 1

    Set a price for your house. Consider listing the house at a higher price than your minimum to allow you to discount the house, which many buyers expect.

    Step 2

    Stage the house. Putting display furniture, paintings, towels and other items in an empty house reduces the time a home sells compared to an empty home by an average of 29 days, according to the International Association of Home Staging Professionals.

    Step 3

    Hold an open house to allow the public to walk through the house on one day, rather than having individual showings.

    Tip

    • Many home centers will not only sell you materials, but give you advice on how to install simple tiles, paint a room, reface cabinets or install fixtures.

    Warning

    • Check out the prices of recent home sales in your target neighborhood. Homes with the same number of bedrooms, baths and square footage are known as comparables, or comps. Trying to sell a house for a much higher price than the comps in a neighborhood will decrease the number of potential buyers and may force you to lower your price.

    About the Author

    Sam Ashe-Edmunds has been writing and lecturing for more than 25 years, covering small business, personal finance, health, fitness, nutrition and sports. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He in an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Professional Pet Sitter, the Chicago Tribune, South Florida Sun-Sentinel and Ventura County Star, and on websites such as Motley Fool, LIVESTRONG, Tyra Bank's Type F, USA Today, TheNest, JillianMichaels.com, GolfSmith and Zacks.

    Photo Credits

    • Digital Vision./Digital Vision/Getty Images