Can you make money buying subject-to and renting it out?



Subject-To and Renting

Purchasing property “Subject To” is a buying strategy in which the title or deed changes ownership while leaving the seller’s existing financing in place. Therefore,  the investor uses none of his own credit (and many times none of his own money) to acquire the house.  To grasp the concept of a subject-to transaction, it is important to understand that the deed or title and the mortgage or note are two completely different documents.  This means that you can sell the deed to an end buyer while keeping the existing mortgage in place.   Therefore, as an investor you are buying the property ‘subject-to’ the seller’s existing mortgage payments staying in place.

Once a property has been acquired subject-to, there are three common selling strategies:  retail sale, wrap around mortgage, and rental.  This article will focus on the benefits and detriments of purchasing property subject-to and renting it out.

Subject-To and Renting Benefits

The best time to utilize the purchasing subject-to and renting strategy is when the interest rate is low, rents are high, and the subdivision is appreciating.  The main benefits of a longer term buy and hold approach like the subject-to and renting strategy is the monthly cash flow, the tax advantages, and the equity growth.  Whenever rents are greater than the mortgage and you can earn monthly cash flow, it is worth looking into a long term rental strategy.  Especially if the area is appreciating.  If you’ve done your research and believe that the subdivision is going up in value, then having someone else (in the form of the renter) pay your mortgage for you makes good business sense.  With a subject-to and renting approach, any appreciation becomes your equity.  Finally, this strategy makes sense if because you will be able to take advantage of the tax benefits of property ownership (remember, you have the deed).  To summarize, the benefits of the buying subject-to and renting strategy are positive monthly cash flow, tax write-offs, and the ability the keep the appreciation value.

Subject-To and Renting Detriments

Generally, when you purchase subject-to, you will want to sell as quickly as possible.  Subject-to purchases are not long-term strategies, and renting is consistent with a longer term exit strategy.  The longer you hold onto the property, the more risks you occur.  The first risk is that you become a landlord.  If you have a good tenant, then being a landlord isn’t too bad.  But if you have a tenant that breaks things, complains, and doesn’t pay on time, than renting can be a nightmare.  Remember, when you acquire a property subject-to, you become entrusted to make the mortgage payments, and anytime a renter doesn’t pay, you have to.  Anytime something breaks, you have to fix it.  Therefore, before choosing the subject-to and renting strategy, make sure that you have enough cash on hand to cover the mortgage.  If cash is tight, then this is not a good strategy to utilize.

Finally, as with every subject-to purchasing strategy, there is always the risk of the banks calling the note due.  The ‘due on sale’ clause, which allows the banks to accelerate the note if a sale has taken place without their permission, is probably the biggest reason most investors want to sell the property quickly.  Though the due on sale clause is rarely used by banks, it is still a threat to the success of the transaction.  Before acquiring a property subject-to, you should always consult with your real estate attorney.

In conclusion, the buying subject-to and renting strategy is best used when the subdivision is appreciating, the original loan has a low interest rate, and rents are high, as long as you have ample cash reserves and the patience & tolerance to be a landlord.

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