I am actively searching for my first deal for a flip and I feel split between two schools of thought that I have heard through various BiggerPockets resources:
School 1: get a property at a great discount and have a thorough understanding of rehab costs and ARV so you can ensure you make a profit and mitigate your risk. Generally flips stick close to the existing floorplan while renovating all the cosmetic kitchen and bath stuff.
School 2: location, location, location. House is either a tear down or gut rehab, generally in a highly desirable area. Investors can afford to buy at retail price because they aren't at their "highest and best" use. Investors tend to add sq footage, add a second story, add accessory dwellings, or subdivide existing lots to tap new value.
In my market the best deals I see are on single story ranch homes of 1200-1600 sq ft in size. My market supports new 2500-3000 sq ft homes at $150-$200 per square foot which tells me I could pay a premium for the 1200 square foot ranch that is functionally obsolete and turn a profit by adding a second story.
My instincts stay start with what is safe and expand on what I understand. Start with the small ranch rehab. as I get experience, get a little more creative. Do the first deal with the current floorplan. Do my next deals with reasonable additions. Learn what goes into it until the pop top isn't so scary.
I think you just answered your own question, listen to your instincts. I don't know what amount of capital you are willing to spend on this rehab but do what is safe for now, get the experience, see for yourself how truly frustrating rehabbing is, then go on from there. Good instincts Bro.
There is a lot more time, money and involvement in that large of a renovation. What kind of profit would you expect for the 1200 SF rehab? What kind of profit would you expect for the pop top SF add?