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How House Flipping Works

House Flipping Tips
Kitchens are one of the most important areas to fix up in a flip.
Kitchens are one of the most important areas to fix up in a flip.
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If you're planning to buy a new-construction home, budgeting can be simple. It's just like buying a home you actually plan to live in -- you need to cover the mortgage, insurance, taxes, real-estate agent and lawyer's fees, and that's about it. However, in a softening market, the supply of houses is much greater than demand, so you may own that property for longer than you plan to.

If you're working on a fixer-upper, the budget starts to grow when you consider the renovations you'll need to make. According to most experts, you should add 20 percent to your estimate for the final cost. If you overestimate, you get a surprise windfall -- but if you underestimate, you get stuck with unexpected bills.

Structural improvements -- like plumbing, electrical, insulation, pest control, and HVAC -- are typically the least sexy but most important improvements a flipper can make. New hardwood floors and coat of paint may get buyers in the door, but a termite problem can kill a deal quickly. If your technical skills are lacking here, you'll have to figure in the cost of labor, too (that includes the time and money lost if you're waiting on your brother-in-law to finish the electrical wiring).

Most real-estate agents advise fixing up the kitchen and bathrooms for the best return on your investment. In addition to the structural changes, this can include new cabinetry, counters, hardware, sinks, backsplashes, appliances, floors and lighting. Kitchen upgrades can be expensive, but they make a big impression (granite countertops and wine storage, for example). You could also decide to go green (see How Green Building Works), which can add value to the house when the improvements are marketed as money-savers. Obviously, you'll keep costs down if the house is in good structural shape and just needs updated paint and carpets -- but things can quickly get pricey, especially if you're using contractors and outside labor.

Another aspect to consider is curb appeal -- the outside of the house. You might need to paint, landscape and fix up the driveway, which adds to the budget. If you've bought in a pricey neighborhood, mowing the lawn and repairing the fence may not be enough -- there could be homeowners' association fees. In up-and-coming neighborhoods, you might have to budget for security measures.

So once you have your budget, you can choose your spot, which we'll discuss next.