Two Options On Property - Rental vs Selling With Creative Finance (Lots More Profit)

[Ken M.]

I was asked by a new to real estate couple, to compare doing a 20% cash down, Buy & Hold Rental property using conventional financing and buying Subject To and selling to a Tenant Buyer with creative finance and what that would look like.

This is an actual deal I did. I bought a 4 Bed 2 Bath 2000' property in a decent neighborhood in Mesa AZ that was built about 1985.

In this Spreadsheet I am comparing: 

OPTION: 1 Conventional Financing for "Buy & Hold" for a Rental vs

OPTION: 2 using "Subject To" and Reselling to a Tenant Buyer

OPTION: 1 As a Rental, the Kitchen and Bathrooms needed updating requiring about $5,000 of work in order to be ready to be a Rental. From the Renter I would get first month’s, last month’s and deposit. I would have to have a loan from a bank with 20% down or about $45,000 to qualify.

OPTION: 2 Selling it to a Tenant Buyer requires no rehabbing on my part. The Tenant Buyer will do (or not) the rehab to their liking. From the Tenant Buyer I get an Option Payment of $25,000 and a rent payment when they take possession. There is no deposit. Here I simply take over the existing loan and payment & need about $15,000 “Cash on Hand” to cover expenses & reserves etc. I can sell the property for more because he doesn’t have to qualify at a bank and will pay a slight premium.

Let’s see how the numbers work.

	OPTION 1:		OPTION 2:
	When Seller Uses RE Agent & You're Using Property For a Rental		When Buying Subject To & Selling to Tenant Buyer
Pro:	Doesn't require specialized knowledge	Pro:	Little competition
	"Adequate" cash flow - Nothing Exciting		Can be little $ down
	You get appreciation if property goes up		Can do Unlimited number
			Can Get Started Much Sooner
			Get down payment (Cash $$) back immediately
			Great Cash Flow
			No Bank Approval Needed
			No Maintenance or Repairs
Con:	Have To Have $45,000 Cash for Down Payment	Con:	Have To Have $15,000 Cash For Reserves (just in Case)
	Have To Have $15,000 Cash for Closing & Carrying Costs		Due on Sale Clause
	Have to Get Bank Approval		Must learn the technique
	Can only do 4 -10 properties depending on bank
	Competing with everyone else
	Requires 20% Down & other requirements
	If AC breaks - you fix it
	If roof needs replacing - you pay for it
	If toilet clogs - it's on you
	If house gets trashed - you un-trash it
	You take loss if property goes down in Value
	Tenant Can Trash The House

	When Seller Uses RE Agent & Using Property For a Rental		When Buying Subject To & Selling to Tenant Buyer
Asking Price MLS	$225,000		$225,000
Balanced Owed	$223,969		$223,969
RE Agent 6%	$13,500		$0 No Agent Involved
Seller Brings to Closing	($12,469)		$0 So No fees
Asking Above ARV	$0		$0
Seller Walking Money	$0		$0 Sometimes Walking Money
	If I Use Conventional Financing		If I Use Subject To
Asking Price MLS	$225,000		$225,000
Amount Down - 20%	$45,000		$100 (I Give $100 Down)
New Loan Amount	$180,000		$223,969 I Take Over Loan
Title Report	$600		$600
Closing Costs	$1,250		$1,250
Monthly Payment	$1,151		$1,225 I Take Over
			Existing Payment