This is another in a continuing series of articles on beginning real estate investing. Today, we’ll tackle the basics of “subject to…” investing. There are a lot of questions those who are just beginning real estate investing often have about “subject to…” investing, and this article should answer many of your fundamental questions.
First of all, it’s important for those who are beginning real estate investing to know what “Subject To…” investing is. “Subject to…” means that you buy a property “subject to…” the existing financing staying in place in the seller’s name.
Say that you get a call from a motivated seller. He tells you he must sell his house immediately. He also says he owes around $100,000 on his mortgage, his payments are around $900 per month, including principal, interest, and taxes. Even though you are only just beginning real estate investing, you know the estimated market value of his home is about $130,000.
You head on over to his home. It doesn’t matter in the least that you are just beginning real estate investing. After all, he needs to sell now. You tell him that you will take over his mortgage payments, and keep on making them until you get the house sold. You don’t know how long it will take, but the mortgage will stay in his name until you get it sold.
He asks if you can give him some cash to help him move. Even someone who is beginning real estate investing can negotiate an item like this. After going back and forth a couple of times, the two of you agree on $3,000, which you will pay to him the day he moves out.
Now, what have you got? A house with an estimated value of $130,000 that you will wind up paying about $103,000 for, and a payment of $900 per month. Since you are just beginning real estate investing, there is something you must do right away… market for a tenant buyer.
So, you place an ad in your local paper, and put up a few signs in Mr. Seller’s neighborhood: “Lease to Own – Bruised Credit OK.” Your phone starts ringing and you find a young couple with good jobs and good income who went through a brief period of financial trouble a year or two ago. You explain to them that even though you are just beginning real estate investing, you think you can help them.
You offer to lease them the home with a 12 month option to buy it. Their monthly lease payment to you will be $1,200, and their purchase price will be $135,000. They will also give you a non-refundable option fee of $5,000. It doesn’t matter that you are only beginning real estate investing- you can certainly see what you have just accomplished.
You’ve got monthly positive cash flow of $300 – the difference between the $900 you are paying and the $1,200 the young couple is paying you. You have also put $2,000 cash into your pocket right now – the difference between the $3,000 cash you gave the seller and the $5,000 cash the young couple gave you. When the young couple exercises their option to buy, you will also pocket $32,000 – the difference between your purchase price of $103,000 and the price they pay you, $135,000. Not too bad for someone beginning real estate investing!
We’ve barely scratched the surface of “subject to…” investing, but I think you’ve got the idea. I’ve got more great ideas for you at Beginning Real Estate Investing.
Now, go make more offers!