You probably heard of the saying "you make your money when you buy, not when you sell". Let's say you buy at market value and hold your breadth for the appreciation to get you out of the whole, you are not an investor, you are a speculator.

Whether you buy and hold, or flip, or a wholesaler selling to a rehabber, the heart of your calculation is the estimated (ARV) after repair value of a house. Be cautious to get recent sales of comparable properties, to accurately estimate repair costs with considerations of an extra 10% for intangibles. Be sure to take into account all costs involved, including closing costs, interest on loans, insurance cost, taxes, marketing costs, and utilities, etc. Remember to take into account the costs associated during the repair period and during the time it takes to sell the house after it's being repaired, basically, your holding time. Your holding cost will vary depending on the market and the economy, so you should consider an average of six months or more between the time you purchase the property and the time you sell it.

So you found a house that you want to buy. What now? Determine how much the house worth is. Look in your county website to find property sales figures to estimate the value of your subject house or by looking at how much similar properties in the area have recently sold for. You can also ask a real estate agent to prepare a CMA (comparative market analysis).

In determining your rehab cost, make sure you add a 10% cushion just in case to cover the intangibles. Get a hard money lender that will lend you 100% of the purchase price with an interest on the loan no more then 12% with 3 points due at purchase closing. Consider your holding cost to include insurance, utilities, taxes, interest on the loan, etc. Lets say you estimate the time it takes to rehab the house is 1 month and to sell/rent it in three months (or longer), giving yourself four to six months between buying and selling the property.

You could estimate your buying closing costs at 3% of purchase price plus the 3 points of the hard money loan (total = 6% of purchase price), and your selling closing costs at 2% of selling price plus 4% Realtor's commission (total = 6% of selling price).

(ARV) After Repair Value - Purchase price - Closing Cost Buy - Holding Cost - Rehab Cost - Closing Cost to sell = Potential Profit

To calculate the return on your investment you have to divide your profit by the amount of cash that came out of your pocket. Out of pocket expenses in this case are the closing costs to buy, all the holding costs and the rehab costs. The closing costs to sell (including the Realtor® commission) are not considered cash out of pocket since they are deducted from the proceeds of the sale.

Let's say you decide not to endure the rehab, come up with the money, and wait for the holding time, and you now want to wholesale it (sell it to an experienced rehabber). You set a $5,000 wholesaling fee for yourself, and assign the contract to a rehabber (basically, the rehabber will pay you $5,000 for the right to purchase the house at your negotiated discounted price). The rehabber will get a bigger profit than your wholesaler's fee since he will be taking over the risk. Perhaps, the rehabber might do most of the work himself, he may be able to cut down the rehab costs. He can also save more by not using a Realtor® to sell the house, saving the 3 - 4% commission and further enhancing his profit.

Remember that when you error (and you will), error on the conservative side. It's not whether or not something will go wrong, expect Murphy's Law to creep up! If the numbers don't work out ... don't try to fudge it to make it work. There are plenty of other opportunities out there.