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The Truth About Subject-To Real Estate Investing

Subject-to investing is one of the most misunderstood real estate strategies. There’s a lot of misinformation floating around, which makes it a controversial topic. Here, I aim to clear the air and explain what subject-to investing is, its advantages, and what you need to consider before diving in.

What is Subject-To Investing?

Subject-to investing involves acquiring a property with an existing lien or encumbrance still in place. This means you take over the title of the property, but the mortgage remains in the seller’s name. This strategy can be used for various property types, and you don’t need significant discounts, distressed properties, or even substantial equity to make it work.

Here are the key points:

  • You are not assuming the mortgage: The mortgage stays in the seller’s name.
  • No need for significant discounts: You don’t need a distressed property.
  • Can work with minimal/no equity: You can even deal with properties that have a bit of negative equity.

Advantages of Subject-To Investing

Subject-to investing leverages the seller’s credit, meaning you don’t need to use your own credit to acquire properties. This strategy can provide both cash flow and capital gains, depending on how you handle the property after acquisition.

Cash Flow and Capital Gains

Subject-to investing allows you to generate income in multiple ways:

  • Cash Flow: By renting out the property.
  • Capital Gains: By selling the property later at a higher price.

No Credit Needed

You use the credit of the existing borrower to acquire and control the property, making this an attractive option for real estate investors with limited credit.


This is primarily an acquisition strategy, allowing you to combine it with other strategies to maximize profits. Here are some options:

  • Hold as a rental for steady income.
  • Rehab and sell it for retail profit.
  • Sell it with owner financing, such as a wrap loan.

Not a Zero Money Strategy

Some people advertise subject-to investing as requiring no money. This is misleading. While you don’t need credit, you do take on the liability of the seller’s mortgage. This means you must have the cash reserves to make payments and cover unexpected expenses.

Taking on Liability

When you buy subject-to, you promise to make mortgage payments on behalf of the seller. If you fail to do so, you could create issues for both yourself and the seller.

Ethical and Moral Responsibility

You have a moral obligation to the seller to make those payments. This isn’t a get-rich-quick scheme; it’s a serious commitment.

Advanced Strategy Considerations

This is not a beginner strategy. You need to be prepared with a solid plan and knowledgeable advisors. Legal and financial counsel is essential, as well as professionals like licensed mortgage loan originators. Adequate capital is also crucial for holding costs.

Long-Term Commitment

Subject-to deals are often long-term commitments, spanning 15-30 years if you opt for a wrap. This is a strategy that requires thorough understanding and a long-term outlook.

Essential Professionals

You’ll need a team of professionals:

  • Legal Counsel: To navigate contracts and agreements.
  • Financial Advisors: To manage the financial aspects.
  • Mortgage Professionals: To handle the loan parts of the deal.

Visual Representation of Subject-To Transaction

Imagine a property worth $120,000, with the seller behind on payments totaling $5,000 and a remaining mortgage of $95,000. As an investor, you might decide to pay off the past due payments and take over making future payments, while the loan remains in the seller’s name. This visual representation can help you understand the moving parts of a subject-to transaction.

Numerical Example of Subject-To Profits

Sample Deal Breakdown

Let’s say you acquire a property worth $120,000. The seller owes $95,000 on their mortgage and is $5,000 behind on payments. You agree to:

  • Pay the $5,000 in past due payments.
  • Take over the monthly mortgage payments.
  • Rent the property for $1,200 per month.

Monthly Cash Flow

  • Rental Income: $1,200 per month
  • Mortgage Payment: $768 per month
  • Positive Cash Flow: $432 per month

Five-Year Profit

  • Gross Cash Flow: $432/month x 60 months = $25,920
  • Sell Property for $120,000:
    • Pay off Mortgage: $95,000
    • Capital Gain: $25,000

Total Profit

  • Total Gross Profit: $25,920 (cash flow) + $25,000 (capital gain) = $50,920
  • Minus Initial Investment: $50,920 – $5,000 = $45,920

That’s a significant profit from a $5,000 initial investment over five years.

Primary Considerations for Subject-To Investing

This is not a strategy for the faint of heart or the unprepared. You need to be ready for a long-term commitment and have adequate resources in place.

Key Points to Consider:

  • Not for beginners: Seek mentorship or partner with experienced investors.
  • Financial resources: Ensure you have funds for unexpected costs.
  • Professional guidance: Legal and financial counsel is crucial.

Subject-To as an Acquisition Strategy

Subject-to is mainly an acquisition strategy. It allows you to acquire properties quickly, sometimes within 24 hours. However, selling subject-to is not ideal as it results in a loss of control.

Exit Strategies

Once you’ve acquired a property subject-to, you have several options:

  • Rentals: Hold the property and generate rental income.
  • Rehab and Retail: Fix it up and sell it for a profit.
  • Wrap/Owner Financing: Sell the property with owner financing.

Final Thoughts

Subject-to real estate investing can be a powerful strategy for savvy investors looking to leverage existing mortgages without the need for significant credit or large capital outlays. While it offers unique advantages like immediate cash flow and the potential for substantial capital gains, it is not without risks and responsibilities. This approach requires a solid understanding of the market, reliable financial resources, and a team of knowledgeable professionals. It’s a long-term commitment that demands careful planning and ethical considerations. For those willing to invest the time and effort, subject-to investing can be a rewarding addition to their real estate portfolio.

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