Understanding Subject-To Deals in Real Estate

Aug 8, 2024

Lecture Notes: Real Estate Investment Breakdown and Subject-To Deals

Key Concepts and Definitions

Subject-To Deals

  • Definition: A real estate transaction where the buyer takes over the seller's existing mortgage payments.
  • Importance: Allows buyers to acquire properties with favorable interest rates and terms without needing new financing.

Motivation for Sellers

  • Job Changes: Can necessitate quick sales to relocate.
  • No Equity: Sellers who bought recently might owe as much or more than the property’s current value.
  • Financial Pressures: Holding costs for vacant properties or multiple mortgages.

Real Estate Agents

  • Common Issues: Many agents lack understanding of creative financing options like subject-to deals.
  • Expired Listings: A significant opportunity for acquiring properties at a discount.
  • Advice for Agents: Learn about creative financing and consider switching to a broker who invests in real estate.

Case Study: Flower Street Deal

Initial Steps

  • Seller's Situation: Recent job change, no equity, bought property with a VA loan (0% down).
  • Agent Involvement: Initially listed with an agent who failed to sell the property.
  • Student Involvement: Kevin, a student, identifies the seller and gets involved after the agent fails.

Financial Breakdown

  • Purchase Price: $277,500.
  • Key Figures:
    • Interest Rate: 2.625%.
    • Monthly Payment (PITI): $1,268.
    • Rent Rate: $1,800.
    • Payments to Seller: $25,000.
    • Assignment Fee: $15,000.
    • Closing Costs: $5,000.

Private Money Lending

  • Source of Funds: Private money lenders provide the necessary funds.
  • Interest Rate: 8% interest-only payments.
  • Monthly Payments: Approximately $366.

Closing the Deal

  • Documents Involved: Purchase contract, assignment contract, additional seven documents for subject-to deals.
  • Title Company's Role: Manages the transfer of deed and the financial transactions.

Cash Flow and Profitability

Monthly Expenses and Income

  • Total Monthly Payment: $1,268 (loan) + $366 (private money) = $1,634.
  • Rent Rate: $1,800.
  • Net Cash Flow: $166 per month, break-even after considering potential vacancies and repairs.

Long-Term Financial Outlook

  • Pay Down of Loan: Over time, the mortgage principal decreases, increasing equity.
  • Market Appreciation: Property value expected to rise, enhancing the investment's profitability.

Exit Strategies

Options to Enhance Cash Flow

  • Group Homes: Lease property for higher rates; potential income $3,600/month.
  • Airbnb: Short-term rentals can yield $3,500/month.
  • Midterm Rentals: Longer-term rentals, similar income potential to Airbnb.
  • Corporate/Insurance Rentals: Higher rental income compared to traditional leases.

Choosing the Right Strategy

  • Dependence on Resources: Availability of operators for group homes, management capabilities for Airbnb, etc.
  • Personal Preferences: Different strategies suit different investors based on their skills and risk tolerance.

Additional Resources

  • Learning Material: Wealth Without Cash by BiggerPockets.
  • Video Companion Guide: Detailed explanations and breakdowns for each exit strategy and real estate concept.

Conclusion: Understanding subject-to deals and creative financing can significantly enhance real estate investment opportunities. Proper documentation, a good title company, and knowledge of various exit strategies are key to success.**