What is a "Rehab and Flip" Profit Model and How Does it Work?
 
   A Rehab and Flip transaction occurs when you purchase a property from a distressed seller for a deeply discounted price, and then rehab it to increase its resale value. Once the rehab is complete, you typically sell the property on the open market for the best price. Rehabber's add value to a property by repairing and upgrading it, expecting to sell the house for nearly full value to a retail buyer. Nevertheless, in some hot (fast appreciating) markets, rehabbers will often "flip" a property to another investor at a lower price for quick cash.
 
     The Rehab and Flip Profit Model is one of the most complex, high-risk Profit Models. In addition to all the usual due-diligence and financing necessary to purchase the property, you will also have to finance and manage repairs and upgrades. This is an advanced model, and previous real estate and investment experience, or mentoring by an experienced rehabber, is highly recommended. If it were our money, we'd make previous experience a requirement.

MATRIX RATING: Medium Risk, High Complexity.

INVESTOR LEVEL: Only reasonably experienced investors should attempt Rehab and Flips on their own. The complexity and risk are higher than most type of pre-foreclosure transactions due to the cost, time and project management risk associated with handling the expenses, labor and contractors working on the property. Even for the handyman rehabber who plans to do the work themselves, properly assessing the condition of the house, estimating repairs, assuring local code compliance and more are some of the many issues that must be be managed and mitigated.

WHAT'S REQUIRED: Familiarity with real estate contracts and physical building construction and renovation estimating/techniques. Credit if you plan to purchase the property on your own. Cash or credit financing to pay for the rehab, carrying costs and contingencies (unforeseen costs).

WHAT'S OPTIONAL: Good construction/rehab project management software to help manage cost, schedule and performance of rehab work.

WHAT'S ADVISABLE: Extend your due diligence to find reputable contractors and get  estimates for repairs - BEFORE YOU BUY THE PROPERTY. Even if you consider yourself a handyman, get 1 or 2 estimates for each major item you plan to renovate and be sure to increase these numbers by 10% - 30%. Due diligence is much less expensive and time consuming than "winging it" to only find out near the end of the project when you're out of money that you missed important items or have to redo work done improperly or poorly. Also be sure to get reputable contractors and subcontractors to quote and perform the work you don't do yourself.

ASSESSMENT: Rehab and Flip is a good investment vehicle for a handyman investor who can buy undervalued distressed property at at discount, fix it up and sell it quick for a fat profit. If an investor buys a property without the proper experience and relies wholly on hired contractors, the probability of losing money on contractor labor, etc.

BENEFITS: For a qualified Property Dealer or Landlord investor who is comfortable with managing the rehab project, Rehab and Flip is a great way to leverage "handyman" skills for profit. The returns on an investor's time as a rehabber on their own project are typically much greater than if they were to work and get paid as a contractor only. While there are no tax benefits with a Rehab and Flip, they can be a great way to generate lump sums of cash for the investor.

CHALLENGES: The biggest challenges with a Rehab and Flip are the money and time risks one must take to acquire the property, get accurate rehab estimates, hiring contractors/performing the work, managing contractors, mitigating setbacks, and paying carrying costs while the property is being worked on. This type of Profit Model requires the most out of pocket cash to pay for rehab and property carrying costs.