Let’s talk about specific subject-to deals so that you can see the structure and how it works. I’m going to show you one of the types of deals that we do in our Millionaire Matrix so that you can see how this process works and how cool it is – where you don’t have any money, no credit in it and it makes you money for the rest of your life.
These are cool deals and they’re pretty easy to put together if you use the Push Button system that we’ve got which automates the whole process of bringing your buyers and your sellers to you; we love it. It’s how we built our rather substantial portfolio doing it.
This subject-to house is currently in our inventory. We haven’t even advertised it for sale. We kept it as part of our portfolio. We’re holding onto it as a long term strategy, but we are willing to sell it as well. So we’ll show you what we do with some of these properties. The beauty of it is it’s so easy to find these properties.
There’s so many of them available out there that it’s not difficult to sell them. So if you ever want to buy this way and don’t want to do the work to find the properties, then give us a call and we’ll put one together for you.
It’s going to be an unusual type of investment and you’re not going to get your head around it at the beginning because at first glance, it’s going to seem like a crazy idea, especially when you look at these numbers that we’re going to show you here.
Let’s go into this one specifically. You can take over this property. We find a homeowner that says he can’t afford to make the payments any more. He wants to move. We’re current on our payments. We’ll make his next payment for him and then he’ll deed us his property and we take it over.
If you want to learn how to do subject-to deals, we teach it in our mentor program at zerodowninvesting.com and you can learn about that, or you can learn it in my push button method – pushbuttonmethod.com.
And we actually have some automated systems to bring folks in who do this, a complete FSBO subject-to system that automates the entire thing so that all you have to do is pick up the phone when the seller’s ready to go and then you sell it to them.
They don’t flood in with that method but they come in enough to get one or two of them a month and get the process going. But you have to be careful with negative cash flow. And we’re going to talk about that right now.
Here’s the numbers on this particular property. This was a brand new property when we got it. You can see the dumpster was still outside, so it was less than a year old. The current mortgage that we were taking over was $162,000.
That’s a little bit above its actual market value right now. The markets dropped maybe $10,000 or $15,000 from this value so we’re actually taking it over for a higher mortgage than it’s worth. We’re paying more for the property than its real value. But let’s see if it’s a sustainable deal.
First of all, it’s got $1,300 a month income on it, which is market rent for this property. And we’re getting that. We’ve got a tenant in there who’s been in there for a couple of years that is paying $1,300 a month on this property.
The payment that we have to make for this mortgage is $1,195 a month. That breaks down to $193 principle, 76% interest, $157 in property taxes and then the mortgage insurance because they didn’t have 20% down when they got the loan so they’ve got to pay mortgage insurance for a few more years.
And then property management – this is what she’s charging us – we get a little bit cheaper property management than you would because we’ve got a lot of properties. So the total payment that we’ve got going out every month is $2,900 every month. We’ve got $1,300 a month coming in so that means we’ve got $1 positive cash flow, right? And in fact, what that means is we’ve got less than that because there’s always a risk of vacancies.
There’s a risk of repairs that have to be done. So does it make sense to take a property like this if this is the kind of deal that you’re getting? Some people would say absolutely not – there’s lots of other ways to do it. But, and this isn’t the only thing that you can have in your strategy, you’ve got to have cash flow in your strategy as well, but this is a long term investment and it makes a lot of sense. Let’s look at the rest of the deal here.
The mortgage that’s on it is a 5.75 fixed mortgage. It’s a 30 year mortgage. There’s still 27 years left to this mortgage as of the time we’re recording this. Last year, it cost us $500 to keep this property. We didn’t make it to our 12. It cost us $500 because we had some repairs that had to be done, so we ended up paying $500 to keep this property, but we got some benefits from it.
We got depreciation on the property, which because we’ve a real estate professional (and you can be too if you work 750 hours a year in real estate) and if you don’t, then you’d have to take it off of your passive investments, although you can – well, there’s some other rules on this – we’re not going to get into all of that. But there is some depreciation on this one.
We’re able to depreciate by 27.5 years, so let’s say $130,000 is the cost of the improvements on this. If we divide that by 27.5 we get $4,700 a year we can deduct from our taxable income. So let’s say your taxable income was $75,000 that year. You could reduce that $75,000 income and only pay income on what? – $71,000 of that, or $70,300 actually, because you’d be taking $4,700 off of that.
So if you’re in the 35% tax bracket that means that you’ve got 35% of that. That means your actual savings is about $1,600 a month. So if it costs us $500 to keep that property, with just depreciation alone, we made $1,100 above what it costs us.
Now we might have had a vacancy so it might have cost us a month or two of payments. So you have to be aware of that and make sure you have enough cash flow to handle it. We’re in a position to where we do. Fortunately, if you advertise a bunch of properties, you’re not going to have too big of a problem.
There’s also the mortgage buy down. Let’s go back to this other page here and show you that the principle, $193 a month, is being paid towards principle; about $2,300 a year is going toward principle. So with the $1,600 plus the $2,300 that brings us to about $3,900, minus the $500, so now we’re at $3,400 a month if we paid that $500.
So now it’s not too bad even if we had 2 or 3 months of vacancies, that property would still be paying for itself every month and we’d be okay. Also, eventually this property is going to appreciate in value. Even though we paid a little more for it than its current market value, we did it in a time that’s kind of depressed right now. That’s one of the reason it’s so easy to get subject-to properties right now – because of the people who are upside down in their property and they can’t go and sell it with a realtor. So it makes a lot of sense for them to do it this way as well.
If you want to buy it from us, you could pay us $5,000. We wouldn’t give you the deed to the property. Remember we talked about staying in control of the transaction? We would stay in control of the transaction by staying on the deed and selling it to you on a land contract but on the same terms that the current mortgage is.
So all you have to do is make the current payment on the mortgage and as long as you do that, this property will be yours. You’ll be able to keep it and you’ll be able to get all of the deductions and appreciation and all of the value from that.
So, there’s going to be a vacancy eventually on this property because we rented it to a tenant, not to a lease option buyer. And by the way, tenants can sometimes stay for 15 to 30 years on a property. On average, people move every 2 to 5 years, but we’ve had an awful lot of properties that people stayed in forever it seems like.
Anyway, if they moved out, then if you wanted to, you could go out there and lease option that property. We use a professional property manager, and we don’t want to screw with going out and finding a lease option tenant and we don’t need the extra $3,500.
But if we did, and we wanted to make a little extra capital, and let’s say we were having to release this thing or sell it every year or every 2 years, if we could make an extra $3,500 a year on this property, it could pay for any expenses that we had on it and it would offset my negative. Again, you don’t want to do this without some reserves. You’ve got to make sure you have some money in place but if you have some reserves, it’s a pretty good bet that you’re going to come out ahead.
You don’t want to lose this property back to me. You don’t want to stop making your payments and then have me coming in and having to take it over. And if you bought it from us, we’d require that you use our manager because it’s somebody we trust. We want to make sure it’s managed properly because we have an obligation to the owner of the property to make sure that it’s paid for properly.
Anyway, that’s subject-to deals. You can go in there and learn how to do them and how to find them yourself and use a lease option fee. By the way, we’ve seen people make 3 or 4 lease option fees on one property in one year because the people would be in it for 2 or 3 months and then stop paying it, then they’d go lease option it to somebody else
So in a way, it’s kind of a benefit to you if they default if you’re selling it on a lease option because you’re going to make more money than you’d make on your rent. Now, it’s not our desire ever to have somebody fail in these situations but at least you know that if they do, you’ve got a way to make up for it.
That’s subject to. Subject-to is an exciting way to buy properties and we think most people had no idea they could buy this way until somebody said, ‘Hey, just have someone deed you the property and you can take it over.’
By the way, you can buy anything subject-to. You can buy multifamily buildings. You can buy commercial properties. You can buy automobiles; anything that’s been financed can be purchased subject-to. You can buy Earth moving equipment. You can buy anything this way. You just have to be able to make the payments on it.
But you don’t have to use credit – you only use down payment. You just get people out of the situation they’re in that want to get rid of those properties and then as long as you have a good exit strategy, and we think hopefully by now, after reading all of these posts about analyzing deals, you know that exit strategy is the number one issue of this whole process. If you have a good exit strategy and you know where it’s going to go, and you’ve got multiple options for your exit, you can make a lot of money. And subject-to gives you all of those things.
By the way, we do sell some subject-to properties, too – turnkey packages that already have tenants in them that are pretty much break even. It’ll cost you $5,000 to take them over from us and then you’ll have a property that is essentially at market value, and maybe in some cases the mortgage is even a little higher than market value, but it’s pretty close to break even.
You’ll be able to hold that thing for 20 or 25 years, be able to get the tax benefits through the year, be able to pay it off over the years and then retire and get the income for life for it. And be able to pass it onto your kids. So if you’re interested in seeing a really high return on that money, let us know and we’ll show you how to buy some of these subject-to properties that we’ve got. We’ve got professional management to handle it for you too, so that you don’t have to worry about it (You don’t). Thanks
Go look at both of those. There’s lots of free information just on those sites about how we do some of this stuff and also how you can get involved in those programs if you want to pay for them. I’ll be happy to teach you.