Here is a good article from Donald Trump:

Five Tips to Lower Your Risk

Here are five ways you can lower your risk when rehabbing real estate:

1. Make sure your contractors are licensed, bonded, and insured Whenever you find people to work on your properties, also make sure they are subcontractors, not your employees. The best protection is to have workers sign subcontractor agreements. Below is a valuable checklist.Make sure the contractors you hire:
   • Carry their own workers’ compensation insurance.
   • Set their own hours, and don’t clock in.
   • Work for others in addition to you.
   • Have their own transportation and tools.

The most important thing is to make sure everyone who works on your property has workers’ compensation insurance. What would happen if someone working on your property fell off the roof and got injured? Well unfortunately, many state courts would hold you liable for those injuries–so ask for proof of workers’ compensation insurance. If they don’t have it, deduct the premium out of their pay and buy it for them. This is the only way to avoid costly liability in the event that an uninsured worker gets hurt on your property.

1. Determine repairs at the outset
   First off, make sure you are only dealing with contractors that you’ve checked out. Call their references, and don’t necessarily go with the least expensive one.Once you’ve settled on a contractor, get a written bid. Have every repair put in writing, listing all materials to be used. List the type of tile to be installed, each plumbing fixture, every can of paint, etc. Lastly, make sure the contractors understand that you’ll hold them to the written bid.
2. Have time limits and per day penalties
   Some investors sign a repair contract and give the contractor six months to finish the job. Four months later, they discover nothing’s been done! Never let more than a week go by without knowing where the job is.One way to do this is to break the job into a timeline. Have completion dates written into the contract so you and the contractors know what needs to happen and when. For instance: If a house needs the yard cleaned, a tear-out, drywall, a paint job, and a new roof, schedule it out. For example, in the first seven days, the yard will be cleaned, the tear-out will be done, and the drywall will be started. By the end of the second week, the paint will be finished. By the end of the third week, the roof will be completed.

   Make sure both you and the contractor understand and agree on this ahead of time. Then, if the contractor gets behind, withhold payment until the work is completed as agreed upon in the contract.

3. Only deal with pre-approved buyers
   You should never sign a contract with a buyer until they’ve been pre-approved for a loan. In today’s market, lending requirements are very strict. So if your buyer tells you he/she is pre-approved, contact their lender or mortgage broker to confirm it.If a buyer intends to purchase with all cash, that’s great! Just make sure you verify that they have the money. Ask for a recent bank statement that shows they have the cash. This is called “verification of funds.”
4. Get the right insurance
   Tell your insurance professional exactly what you’re doing. Make sure you have the right amount and proper type of insurance to cover your investing activities. Put all recommendations in writing and keep them as future protection in case you find that you don’t have enough insurance.Vacant property is often difficult and expensive to insure, so shop around and make sure you’re insured for its full replacement value.

If you follow these simple steps, real estate investing through rehabbing can be incredibly profitable and rewarding.