Fix and flip

Buy a home that needs work, renovate it and sell it. Profit depends on the purchase price, repair costs and timing.

How it makes money

• The sale price minus everything: the purchase, repairs, loan and holding costs while you work, and the commission and closing costs when you sell.
• Profit comes from buying low enough and finishing on budget and on time, not from the market rising.

The honest risk

• Cash you need to start: The purchase cash or down payment, the whole repair budget, and months of holding costs.
• Worst realistic outcome: Repairs run over, the market slows, and you sell for less than you put in while paying loan interest every month.
• What you keep owing: You owe every loan payment, tax and insurance bill until it sells, even if repairs or the sale run late. If you can’t pay, you can lose the property and the cash you put in.
• How long a first deal takes: Months to find a deal, then months of work before you can sell.

What goes wrong on a first deal

• Repairs and time run over: add a contingency and price each extra month of holding costs.
• The profit is usually taxed as ordinary income, and can owe self-employment tax; it can’t use a 1031 exchange.
• Have a fallback: can you rent it if it doesn’t sell at your price?

Your first steps

• Read the lessons on analyzing a deal and tools of the trade.
• Estimate the after-repair value from sold homes already in finished condition; use the 70% rule only as a first screen.
• Learn to estimate repairs, and add a cushion for what you can’t see.
• Line up a qualified contractor (licensed where required), a qualified inspector and an agent before you buy.
• Arrange financing before you offer, and compare every term of a hard-money loan.
• Budget buying, holding and selling costs, not just the repairs.
• Check permit rules with the city or county building department.
• Practice a purchase from start to finish first.