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The “Subject To” Gold Mine – How You Make Money
Joe: Hey, this is Joe. This next one is called “The Subject To Gold Mine.” And Subject To is a gold mine. It’s a beautiful, it’s a beautiful thing. It’s a beautiful structure. When I, the first Subject To I did, it amazed me that I pulled it off. It amazed that anybody would deed their property over to me without me taking over the loan, without me giving them any money. And it happened when I came across somebody who wanted to sell their property but she didn’t have much equity in the property so I didn’t want to, it didn’t make sense for me to buy it as an under market value property, and I said, well, you know, but it also, it had, it was I think it was $120K, I think it had $100K mortgage. It had an $800 a month payment, approximately. It rented for about $1,000 a month.
Joe: And I said, well, if you just deed me the property I will take over your payments and I promise that I’ll make your payments on time and I’ll make them regularly. I’ll put a tenant in there and as soon as the property goes up enough where I feel I can make a profit, then I’ll sell it. And you’ll be out of it. But, even during that time, it usually takes me years to do that, you’re still going to be covered because I’m going to make the payments and it won’t impact your credit. It won’t impact what you can borrow, because the bank will look at it as a mortgage that is offset by the income that’s coming in. And also, it’ll actually improve your credit.
Joe: And this person was thinking about just giving the property back to the bank and letting it go into foreclosure. I mean, it was still on time, and it was current, it was in good condition. But they didn’t want to mess with it anymore. So I said I’ll take this over. I put a lease option tenant in there. I got $5,000 from the least option tenant immediately. I sold it for $125K I think, so I got, I still owed $120K. If they bought that least option I would have made another $20K and I would have walked away happy.
Joe: But that didn’t happen. The people that, the lease option didn’t buy it. And, in fact, they didn’t stay there more than six months. And I sold it again, and made, this time I made $10K, $5K up front and another $5K that I asked for as a promissory note for the lease option fee. And those people started making their payments as well. I think there was one month of payments that I had to make personally between the two properties, but, and actually I tried to charge it to the previous tenant and I ended up getting, being able to accomplish that because they are liable for that. And those people didn’t stay in it either.
Joe: And, you know, I still own the property and, you know, it’s 10 years later. And the property is three-quarters paid off and I’ve been making cash flow all this time. Every year, two or three, I’ll make another five grand on a lease option fee. And it’s a beautiful, beautiful thing.
Joe: Now, it took me ten minutes to set up that deal, to have her deed me that. And all I had to do was come up with that idea. And then after I did that, I started doing it regularly and taking more and more Subject To properties. And that’s part of how I built a portfolio so quickly and so large.
Joe: I also started making money from all the flips and I took that money and put it into other things. But, the Subject To is what builds your portfolio quickly. And it makes it possible for you within, now you’re still going to be looking at probably ten to twenty years before you pay off your Subject To deals. Now, you can pay them off faster if you take the cash flow and you put towards those.
Joe: The other thing you could do with Subject To’s is you can put them into a Roth IRA. Now, I’ve done that with a few of them, but most of my Subject To’s I’ve kept outside my Roth. The reason you can put them inside an IRA is because they’re nonrecourse loans which IRA will allow you to have them, a self-directed IRA will allow you to put a Subject To into it. Now, you still have the UBIT so you can only get tax free money on money that was made with money that you put in, not with borrowed money.
Joe: You can borrow money inside the IRA, but any money that you make you have to pay taxes on it. So, I didn’t put very many into the subject – I didn’t put very many into my Roth. But it’s something to think about if you’re structured properly.
Joe: I also liked having it outside my Roth because I could take the money as, the deductions, the depreciation on those properties as depreciation against my active income because I’m a real estate investor, I’m able to take it against my active income instead of my passive income and that made it possible for me to get, you know, on a $300K property about $1,000 savings in real tax dollars every year. So, you have 10 of those, you’ve got $10K less taxes that you have to pay that particular year. You have 20 of them, $20K. And more and more and more as they grow. So it’s a beautiful thing.
Joe: Anyway, that’s Subject To. You’ve got to have Subject To properties.