Do you ever purchase a property subject to with negative cash flow?
Owen SchwaegerlePro Member
Real Estate Broker · San Luis Obispo, CA · Member since 2016 · 181 posts · 69 votesDo you ever purchase a property subject to with negative cash flow?
Most Popular Reply
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
3yQuote from @Owen Schwaegerle:
Do you ever purchase a property subject to if the property has negative cash flow?Here's the scenario. Purchase price $650K, subject to existing $600K of financing at 3.625%, $25K down, $25K owner carry with principal only payments. Rents are currently $3200/mo.In the scenario it would be getting about -$1,000/mo.Open to hear your thoughts.
Initially it doesn't make sense to do. You could justify it for the tax savings and principal pay down.
26 Replies
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3ySubject To with negative cash flow, is like filling a soda can with vinegar. It may look sweet, but there is no denying it's goining to taste really bad.
Quote from @Owen Schwaegerle:
Do you ever purchase a property subject to if the property has negative cash flow?Here's the scenario. Purchase price $650K, subject to existing $600K of financing at 3.625%, $25K down, $25K owner carry with principal only payments. Rents are currently $3200/mo.In the scenario it would be getting about -$1,000/mo.Open to hear your thoughts.
Initially it doesn't make sense to do. You could justify it for the tax savings and principal pay down.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Owen Schwaegerle:
Do you ever purchase a property subject to if the property has negative cash flow?Here's the scenario. Purchase price $650K, subject to existing $600K of financing at 3.625%, $25K down, $25K owner carry with principal only payments. Rents are currently $3200/mo.In the scenario it would be getting about -$1,000/mo.Open to hear your thoughts.
Initially it doesn't make sense to do. You could justify it for the tax savings and principal pay down.
not generally if your plan is long term hold.. but if its value add or more equity than what your talking about then sure negative cash flow for short term flip just like borrowing money on any other flip.. - 3yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
You're kinda sorta taking 2 different possible big negatives and mixing them together. What could go wrong?
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3y
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3y
No I wouldn't do this unless there was a significant value-add play to force a lot of equity quickly. Without a clear and quick upside, the opportunity cost is too great because I have better uses for $25k with much less risk and headache.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3y
Quote from @Account Closed:
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
Appreciate the fresh perspective Whit. To be clear, you'd be willing to wait 2 years to make $12k back on a $25k investment? With the -$100 month initial cashflow factored in, it's actually closer to $10k, but there may be some tax advantages so we can call that a wash ;) Don't forget to factor in any other expenses the property may have, like cap ex, tenant issues etc. In my experience over the years, every now and then properties require additional capital outlay.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3y
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3y
Quote from @Account Closed:
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
If you're 16 years into the amortization, the seller has plenty of equity and would list, rather than sell Subject To.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3y
Quote from @Account Closed:
Quote from @Account Closed:
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
If you're 16 years into the amortization, the seller has plenty of equity and would list, rather than sell Subject To.
The contract I’m currently in escrow on says differently.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3y
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3yCongratulations. Is the seller getting any cash out?
Quote from @Account Closed:
Quote from @Account Closed:
Quote from @Account Closed:
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
If you're 16 years into the amortization, the seller has plenty of equity and would list, rather than sell Subject To.
The contract I’m currently in escrow on says differently.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Account Closed:
Congratulations. Is the seller getting any cash out?Quote from @Account Closed:
Quote from @Account Closed:
Quote from @Account Closed:
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
If you're 16 years into the amortization, the seller has plenty of equity and would list, rather than sell Subject To.
The contract I’m currently in escrow on says differently.
the OP is not the same as what Whit is talking about would need all of whits numbers to really reply to the position he is taking.. OP had negative cash flow of 1k a month not 100 dollars. - Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3y
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3y
Quote from @Jay Hinrichs:
Quote from @Account Closed:
Congratulations. Is the seller getting any cash out?Quote from @Account Closed:
Quote from @Account Closed:
Quote from @Account Closed:
For crying out loud…you’re getting some bad advice. If a property does -$100 cash flow per month but you’re 16 years into the amortization doing subject to and the principle paydown each month is $1000…I’m doing that deal all day long. Particularly if the downpayment is slim. Two years from now that property will break even on cash flow and with no appreciation whatsoever it will put $12,000 of equity in your pocket. Nevermind the tax advantages.
I repeat, I’m doing this kind of deal ALL DAY LONG.
If you're 16 years into the amortization, the seller has plenty of equity and would list, rather than sell Subject To.
The contract I’m currently in escrow on says differently.
the OP is not the same as what Whit is talking about would need all of whits numbers to really reply to the position he is taking.. OP had negative cash flow of 1k a month not 100 dollars.The principle is the same, but for the record I would not touch the deal the OP is considering. He asked if we EVER do it, and I illustrated a situation where we absolutely do. There are MANY more like it, but as you said, all elements to the transaction play a role.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3y
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3y
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
The only way I’m excited about the deal is if the owner financing principle only loan is 1 or 2 years max. So the entire “negative cash flow” is really positive $1,000 or break even with just additional principle payments that away in less than 2 years.
Ps. It sounds like they have to sell? Why else sell. Either way, you are more in the driver's seat than you think. If the property is worth the $650k you're paying for it, you're the seller's only hope. It will cost them at least $50-60k to sell with a realtor and they'll be bringing money to the table. Which brings up the fact that I hope you're getting a discount off what it would sell for on MLS. If not I think you should be closer to $25k down and nothing else to seller. That's 4% off, less than a realtor would take.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3yJust curious how would you mitigate against a seller filing bankruptcy post sale, just to pick one example? Or a loan servicer randomly messing up the payments to pick another (I’ve seen this happen with a sub to deal, the loan servicer kept switching the payments back to the seller’s info, and the buyer ended up missing a few payments because of it, causing a lot of credit issues, stress and animosity for everyone, luckily the loan didn’t get called but this could happen). I don’t believe you can actually mitigate all the risks with sub to as you say, in my experience anyway. There’s always increased risk with sub to, is there not?
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
- Member since 2023 · 1 post · 0 votes1y
Quote from @Steve K.:
Just curious how would you mitigate against a seller filing bankruptcy post sale, just to pick one example? Or a loan servicer randomly messing up the payments to pick another (I’ve seen this happen with a sub to deal, the loan servicer kept switching the payments back to the seller’s info, and the buyer ended up missing a few payments because of it, causing a lot of credit issues, stress and animosity for everyone, luckily the loan didn’t get called but this could happen). I don’t believe you can actually mitigate all the risks with sub to as you say, in my experience anyway. There’s always increased risk with sub to, is there not?Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
You were right about this btw.... Sub to blew up on him last we heard :(
https://www.biggerpockets.com/forums/50/topics/1225630-due-o... - Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes1y
Quote from @Garrett Cummings:
Quote from @Steve K.:
Just curious how would you mitigate against a seller filing bankruptcy post sale, just to pick one example? Or a loan servicer randomly messing up the payments to pick another (I’ve seen this happen with a sub to deal, the loan servicer kept switching the payments back to the seller’s info, and the buyer ended up missing a few payments because of it, causing a lot of credit issues, stress and animosity for everyone, luckily the loan didn’t get called but this could happen). I don’t believe you can actually mitigate all the risks with sub to as you say, in my experience anyway. There’s always increased risk with sub to, is there not?Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
You were right about this btw.... Sub to blew up on him last we heard :(
https://www.biggerpockets.com/forums/50/topics/1225630-due-o...Garrett, it's really exhausting being so right all of the time ;)
Looks like what happened was exactly what I warned him about too: an insurance/ escrow/ loan servicing company/ communication breakdown issue. Like he says in the post "Everything was smooth until it wasn’t".
I don't take pleasure in being right in this situation, I feel bad for the OP. But this is a lesson that anyone looking into getting into sub2 can learn vicariously, thanks to this forum and thanks to the OP following up with what happened. Risk increases as control decreases and there is always going to be a certain lack of control when title is in one name and the loan is in a different one.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes3yYes, there are additional risks with subto. There are also additional rewards. To mitigate the risk of a seller filing bankruptcy you could
Quote from @Steve K.:
Just curious how would you mitigate against a seller filing bankruptcy post sale, just to pick one example? Or a loan servicer randomly messing up the payments to pick another (I’ve seen this happen with a sub to deal, the loan servicer kept switching the payments back to the seller’s info, and the buyer ended up missing a few payments because of it, causing a lot of credit issues, stress and animosity for everyone, luckily the loan didn’t get called but this could happen). I don’t believe you can actually mitigate all the risks with sub to as you say, in my experience anyway. There’s always increased risk with sub to, is there not?Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
1. Vet their financials beforehand.
2. Hire a lawyer to include terms in your note outlining what happens to the property in the specific event of bankruptcy.
To mitigate the risk of the servicing company errors you could require the servicing company to provide records and statements for both mortgages monthly. You could monitor the taxes and insurance payments yourself. You could also overfund your escrow account and pay these items in full beforehand.
There are ALWAYS ways to reduce risk. - Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3ySounds like a lot of work! Do you do any of that? How about for potential insurance fraud issues?
Quote from @Account Closed:
Yes, there are additional risks with subto. There are also additional rewards. To mitigate the risk of a seller filing bankruptcy you couldQuote from @Steve K.:
Just curious how would you mitigate against a seller filing bankruptcy post sale, just to pick one example? Or a loan servicer randomly messing up the payments to pick another (I’ve seen this happen with a sub to deal, the loan servicer kept switching the payments back to the seller’s info, and the buyer ended up missing a few payments because of it, causing a lot of credit issues, stress and animosity for everyone, luckily the loan didn’t get called but this could happen). I don’t believe you can actually mitigate all the risks with sub to as you say, in my experience anyway. There’s always increased risk with sub to, is there not?Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
1. Vet their financials beforehand.
2. Hire a lawyer to include terms in your note outlining what happens to the property in the specific event of bankruptcy.
To mitigate the risk of the servicing company errors you could require the servicing company to provide records and statements for both mortgages monthly. You could monitor the taxes and insurance payments yourself. You could also overfund your escrow account and pay these items in full beforehand.
There are ALWAYS ways to reduce risk. - Member since 2021 · 4 posts · 0 votes3y
I would take that deal if you had the capital to float you until you can raise rents. It's a punch up front for a great long term hold it sounds like. That rate alone sells it for me. Imagine 7% of 600K and that is a intense number in comparison. Once you get it stabalized and cash flow positive you could do a Cost Segregation study and accelerate the depreciation tax deductions to further increase your cash flow. Costs a few grand up front but jumps you ahead in the end in my opinion.
- Member since 2023 · 40 posts · 34 votes3y
Thank you for sharing your story on the BP forum and asking the community for further guidance. I am using a post from a previous BP discussion similar to yours. I am on the premise that even $1 loss is not satisfactory even in high appreciating markets. Consider the following reasons why:
(1) Variable Costs
In your underwriting, you assume all costs remain fixed. As we all know, especially in this high-inflation economy, goods and services tend to tick upward, including HOA, insurance, and maintenance costs. As a result, your estimated -$1000 monthly loss will increase.
(2) Insufficient Reserves
Have you accounted for maintenance, vacancy, and reserve funds? No acquired properties are perfect and will need some fixes. If you are underwriting this deal without these in mind, you are walking a dangerous path, as one major repair may cause your calculations to spiral.
(3) Unpredictable Future
Who's to say this renter stays here for a prolonged period? How long will it take you to fill the vacancy? Will the labor market tighten up, resulting in fewer potential renters for HCOL units? In "The Psychology of Money" by Morgan Housel, he discusses the room for error. An investor should provide themselves with enough margin to safely cover unforeseen errors or events (e.g., a recession, capital expenditures for repairs, or tenant property damage).
Solution:
The majority of the forum members are against your real estate due to "speculating," whereby an investor bets that the property will appreciate more quickly compared to their losses. I usually do not agree with speculating, but let's provide you with some solutions!
(1) House Hack
I am assuming you secured the property at a low-down payment. If you paid a lower down payment, the loan is most likely owner-occupied, which means you can rent one unit and the renter lives in the other. Consequently, you are paying -$1000 in "rent" towards your own property. In the case of SoCal, this is a fantastic deal!
Also, you secured the property at 3.625% interest rate, it's futile because you are not saving or increasing positive cash flow; instead, you are losing money each month. The primary purpose of lower interest rates is to increase your positive cash flow, not to reduce your losses.
(2) Short-term (STRs) or Medium-term Rentals (MTRs)
I suggest you look into short-term or medium-term rentals as they tend to have higher cash flow compared to long-term rentals. This method will allow you to cover the loss with increased cash flow and enjoy the appreciation. I'll advise you to look at your local laws regarding these types of rentals, as more communities are banning STRs, especially Airbnb or Vrbo.
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As David Greene states, 'Cash flow is a defense mechanism when things take a turn.' I hope this helps, and feel free to send me a PM if you have more questions!" - Real Estate Broker · San Luis Obispo, CA · Member since 2016 · 181 posts · 69 votes3y
@Tommy Nguyen I like your points - thanks for the feedback!
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