I've never done a subject-to deal, but am working a possible opportunity for one.  I put the information below.  Just looking for anyone's insights or if they think I've missed anything.  Thanks!

Scenario: Potential seller lost his job due to a DUI.  Has a wife but can't currently afford the mortgage on their own.  Is looking for a buyer who will purchase home and rent it back to him for a year.  Seller wants profits from sale of house to cover a years worth of rent.  

The Numbers: Home is worth about 220k.  Seller owes about 180. Rent would be 1500-1600.  

My Proposal: I acquire home subject-to and credit seller a years worth of rent at $1500 a month. Win-win as he gets a free place to stay for a year and I don't have to pay a large sum out of pocket to acquire a nice property. After mortgage, HOA, maintenance, etc, it's roughly 1200 a month. that's about 350 a month in eventual cash flow after the first year, assuming conservative rent of $1500. Using the first year of monthly fees as my purchase cost (as I'm getting no rent during this time), that's puts money down at $14,400 ($1200 X 12). Cash on cash return, after first year, of 29%.

Risk: Continued job loss could leave tenant unwilling or unable to move after first year and I'd have to deal with eviction. 

Risk Mitigation: 

1. Offer credit back to seller if he moves out prior to a year, to encourage move out and allow for properly screened tenant to move in.  For example, if he moves out after 6 months, he gets 6 months of rent in cash.  

2. Plan for 6 month eviction process. $2500 in legal fees plus monthly expenses of $1200 X 6 = $9700.  That would still result in a cash on cash return of 17% (granted it would be 18 months before realized), but on a home in a good neighborhood I feel has good appreciation potential.  I could also use an amount smaller than the total as a cash for keys option which would result in a greater return and moving in a paying tenant sooner. 

Terrible idea.  All your solutions depend on future events you have no control over, but based on current track record, are not likely to occur.  In other words, your plan is based on hope.

Your most likely scenario is this:

1 - You spend $14,400 over the course of a year.
2 - Tenant (actually the owner) can't afford to move out due to continued lack of job.
3 - You're want to evict, but since you don't actually on the property...you can't.
4 - Owner no longer your tenant...actually never was since you never collected rent.  Come to think of it, since you were paying their mortgage for them, I guess that made you their "sugar daddy" (I was actually thinking of a different candy...on a stick).
5 - Owner loses property due to delinquent mortgage payments.
6 - You're out $14,400 plus legal (if you actually try to think you can change this result legally).

Hope is not a plan, and emotions have no place in REI as a basis for a solution. That's not being mean, that's just the way it is. This doesn't mean you can't want to help these people. This isn't the way though.

Also, I have no idea how you calculated your cash on cash return since no cash is coming you way, and the CoCR is only calculated over the first 12 months...not 18 as you are trying to do.

See if the seller would be open to you helping him get an apartment and helping him with that for a year. I would sure hate for you to pay his rent for a year In the house you’re buying and then he decides he likes it there and doesn’t want to leave LOL

Originally posted by @Brian C. :

I've never done a subject-to deal, but am working a possible opportunity for one.  I put the information below.  Just looking for anyone's insights or if they think I've missed anything.  Thanks!

Scenario: Potential seller lost his job due to a DUI.  Has a wife but can't currently afford the mortgage on their own.  Is looking for a buyer who will purchase home and rent it back to him for a year.  Seller wants profits from sale of house to cover a years worth of rent.  

The Numbers: Home is worth about 220k.  Seller owes about 180. Rent would be 1500-1600.  

My Proposal: I acquire home subject-to and credit seller a years worth of rent at $1500 a month. Win-win as he gets a free place to stay for a year and I don't have to pay a large sum out of pocket to acquire a nice property. After mortgage, HOA, maintenance, etc, it's roughly 1200 a month. that's about 350 a month in eventual cash flow after the first year, assuming conservative rent of $1500. Using the first year of monthly fees as my purchase cost (as I'm getting no rent during this time), that's puts money down at $14,400 ($1200 X 12). Cash on cash return, after first year, of 29%.

Risk: Continued job loss could leave tenant unwilling or unable to move after first year and I'd have to deal with eviction. 

Risk Mitigation: 

1. Offer credit back to seller if he moves out prior to a year, to encourage move out and allow for properly screened tenant to move in.  For example, if he moves out after 6 months, he gets 6 months of rent in cash.  

2. Plan for 6 month eviction process. $2500 in legal fees plus monthly expenses of $1200 X 6 = $9700.  That would still result in a cash on cash return of 17% (granted it would be 18 months before realized), but on a home in a good neighborhood I feel has good appreciation potential.  I could also use an amount smaller than the total as a cash for keys option which would result in a greater return and moving in a paying tenant sooner. 

Your biggest risk is that after a year when you try to evict him, he claims he never sold the property and it was a loan from you. The judge will probably side with him after an additional year and a half of litigation and $25,000 in legal fees on your side. The guy drinks and drives, do you think he tells the truth? Alcoholics are known liars and manipulators.

Originally posted by @Joe Villeneuve :

Terrible idea.  All your solutions depend on future events you have no control over, but based on current track record, are not likely to occur.  In other words, your plan is based on hope.

Your most likely scenario is this:

1 - You spend $14,400 over the course of a year.
2 - Tenant (actually the owner) can't afford to move out due to continued lack of job.
3 - You're want to evict, but since you don't actually on the property...you can't.
4 - Owner no longer your tenant...actually never was since you never collected rent.  Come to think of it, since you were paying their mortgage for them, I guess that made you their "sugar daddy" (I was actually thinking of a different candy...on a stick).
5 - Owner loses property due to delinquent mortgage payments.
6 - You're out $14,400 plus legal (if you actually try to think you can change this result legally).

Hope is not a plan, and emotions have no place in REI as a basis for a solution. That's not being mean, that's just the way it is. This doesn't mean you can't want to help these people. This isn't the way though.

Also, I have no idea how you calculated your cash on cash return since no cash is coming you way, and the CoCR is only calculated over the first 12 months...not 18 as you are trying to do.

Not based on hope, based on numbers...  You start off stating I'm not actually the owner, but I would be, as the title would be transferred to me as typical with a subject-to.  There would also be a standard rental lease, with a rent of $1 and and a rental increase stipulation after the first year. If you have some insight on why a subject-to purchase doesn't actually make you the owner, I'm all ears. But, if that's the case, I can't see subject-to ever being worth it. 

Part of finding good real estate deals is either creatively solving people's problems, are agreeing to take them on weighing the possible returns.  It's like someone saying they're not going to buy a house with a tenant they know they have to evict, even if it means them getting a much better deal. You factor that risk, calculate the costs and determine if you're comfortable with it.  

As far as the cash on cash return, like I stated, it's based on the first year following the purchase, once it's actually being rented.  If I were to buy a house that needed a 6 month remodel before you could rent it, you don't not count the money invested to buy it upfront because you spent it 6 months ago and then also count the first 6 months of rent as zero in your calculation because you weren't collecting rent while it was being rehabbed.  You make the calculation once the house is ready for rent based on the total money in and what your first year of income is going to be.  Investing is long term, and paying 14k over the first year for a 29% return starting next year doesn't sound too bad to me.  I know it involves extra risk, but there's where I'm figuring out if the risk is worth it.  

I agree that there's a decent chance I would have to evict, and that's why I put that in there as a factor in the decision.  

Originally posted by @John Farady:

Your biggest risk is that after a year when you try to evict him, he claims he never sold the property and it was a loan from you. The judge will probably side with him after an additional year and a half of litigation and $25,000 in legal fees on your side. The guy drinks and drives, do you think he tells the truth? Alcoholics are known liars and manipulators.

 

This is something that I've thought of, and was hoping someone would have experience with.  Because the title is transferred, I'd assume I could evict as the house is mine just like with any eviction.  I'd make sure the sales agreement is clear, notarized, go through a title company, etc., but I could see a judge either feel like I'm trying to get one over on him, or just not understand the idea of a non traditional sale.  I haven't seen/read anything like that, but I'm sure it could happen.  And, as far as the fact that he could be a liar, I fully acknowledge that and why I factored in the likelihood of the eviction.  I also know there's their's a risk of possibility destroying the house, etc., just like with any eviction. 

Getting a deed when there is no exchange of funds puts you in jeopardy of what consumer protection advocates like to call equity-stripping.  You should google the term.

Significantly, the mortgage almost certainly has a due on sale clause.  The moment you change your insurance into your name the bank finds out the property has been transferred and calls the loan.

Originally posted by @Brian C. :

Originally posted by @Joe Villeneuve:

Terrible idea.  All your solutions depend on future events you have no control over, but based on current track record, are not likely to occur.  In other words, your plan is based on hope.

Your most likely scenario is this:

1 - You spend $14,400 over the course of a year.
2 - Tenant (actually the owner) can't afford to move out due to continued lack of job.
3 - You're want to evict, but since you don't actually on the property...you can't.
4 - Owner no longer your tenant...actually never was since you never collected rent.  Come to think of it, since you were paying their mortgage for them, I guess that made you their "sugar daddy" (I was actually thinking of a different candy...on a stick).
5 - Owner loses property due to delinquent mortgage payments.
6 - You're out $14,400 plus legal (if you actually try to think you can change this result legally).

Hope is not a plan, and emotions have no place in REI as a basis for a solution. That's not being mean, that's just the way it is. This doesn't mean you can't want to help these people. This isn't the way though.

Also, I have no idea how you calculated your cash on cash return since no cash is coming you way, and the CoCR is only calculated over the first 12 months...not 18 as you are trying to do.

Not based on hope, based on numbers...  You start off stating I'm not actually the owner, but I would be, as the title would be transferred to me as typical with a subject-to.  There would also be a standard rental lease, with a rent of $1 and and a rental increase stipulation after the first year. If you have some insight on why a subject-to purchase doesn't actually make you the owner, I'm all ears. But, if that's the case, I can't see subject-to ever being worth it. 

Part of finding good real estate deals is either creatively solving people's problems, are agreeing to take them on weighing the possible returns.  It's like someone saying they're not going to buy a house with a tenant they know they have to evict, even if it means them getting a much better deal. You factor that risk, calculate the costs and determine if you're comfortable with it.  

As far as the cash on cash return, like I stated, it's based on the first year following the purchase, once it's actually being rented.  If I were to buy a house that needed a 6 month remodel before you could rent it, you don't not count the money invested to buy it upfront because you spent it 6 months ago and then also count the first 6 months of rent as zero in your calculation because you weren't collecting rent while it was being rehabbed.  You make the calculation once the house is ready for rent based on the total money in and what your first year of income is going to be.  Investing is long term, and paying 14k over the first year for a 29% return starting next year doesn't sound too bad to me.  I know it involves extra risk, but there's where I'm figuring out if the risk is worth it.  

I agree that there's a decent chance I would have to evict, and that's why I put that in there as a factor in the decision.  

 Yes it's based on hope.  The hope in this case are based on the events needed to take place that generates the numbers.  

Unless you are assuming the mortgage (not what happens in a Subject To) the original lender still holds this property as collateral...and can execute the due on sale clause.  You were not approved by the lender for this loan.  You making the payments of the owners mortgage doesn't make you the owner.  The owner can sign the title over to you, but there is a disconnect between you and the mortgage company...that you don't really want to reconnect.

Finding good RE deals is most definitely solving problems.  If in the process you solve the seller's problems, then great, but that only comes into play with distressed owners (notice I didn't say distressed "properties".), but that only works as a good deal if the results work for you.  Yes, risk is involved.  I prefer to not rationalize the risk controls though.  A risk control is only a "control" if you control it.

As far as the "clock" ticking for CoCR, you start the clock once you start spending money.  CoCR means how long it takes you to recover the cash you spent from the time you started to spend it.  There's only one clock...not to separate ones that you combine in a way that makes the numbers look better.

Investing is long and short term. Returns are both liquid (cash) and locked away (equity). The total returns are not as important as the way you receive it. Liquid has a true value that's 5 times its face value. Locked away has a 1 to 1 value, but is useless until you can convert it to liquid. Until then it has value...but, is just a trophy, and if it is generated at the expense of liquid value, it comes at a high cost...and can disappear at a moments notice...and the REI has little or no control over that event.

Originally posted by @Joe Villeneuve :

Originally posted by @Brian C.:

Originally posted by @Joe Villeneuve:

Terrible idea.  All your solutions depend on future events you have no control over, but based on current track record, are not likely to occur.  In other words, your plan is based on hope.

Your most likely scenario is this:

1 - You spend $14,400 over the course of a year.
2 - Tenant (actually the owner) can't afford to move out due to continued lack of job.
3 - You're want to evict, but since you don't actually on the property...you can't.
4 - Owner no longer your tenant...actually never was since you never collected rent.  Come to think of it, since you were paying their mortgage for them, I guess that made you their "sugar daddy" (I was actually thinking of a different candy...on a stick).
5 - Owner loses property due to delinquent mortgage payments.
6 - You're out $14,400 plus legal (if you actually try to think you can change this result legally).

Hope is not a plan, and emotions have no place in REI as a basis for a solution. That's not being mean, that's just the way it is. This doesn't mean you can't want to help these people. This isn't the way though.

Also, I have no idea how you calculated your cash on cash return since no cash is coming you way, and the CoCR is only calculated over the first 12 months...not 18 as you are trying to do.

Not based on hope, based on numbers...  You start off stating I'm not actually the owner, but I would be, as the title would be transferred to me as typical with a subject-to.  There would also be a standard rental lease, with a rent of $1 and and a rental increase stipulation after the first year. If you have some insight on why a subject-to purchase doesn't actually make you the owner, I'm all ears. But, if that's the case, I can't see subject-to ever being worth it. 

Part of finding good real estate deals is either creatively solving people's problems, are agreeing to take them on weighing the possible returns.  It's like someone saying they're not going to buy a house with a tenant they know they have to evict, even if it means them getting a much better deal. You factor that risk, calculate the costs and determine if you're comfortable with it.  

As far as the cash on cash return, like I stated, it's based on the first year following the purchase, once it's actually being rented.  If I were to buy a house that needed a 6 month remodel before you could rent it, you don't not count the money invested to buy it upfront because you spent it 6 months ago and then also count the first 6 months of rent as zero in your calculation because you weren't collecting rent while it was being rehabbed.  You make the calculation once the house is ready for rent based on the total money in and what your first year of income is going to be.  Investing is long term, and paying 14k over the first year for a 29% return starting next year doesn't sound too bad to me.  I know it involves extra risk, but there's where I'm figuring out if the risk is worth it.  

I agree that there's a decent chance I would have to evict, and that's why I put that in there as a factor in the decision.  

 Yes it's based on hope.  The hope in this case are based on the events needed to take place that generates the numbers.  

Unless you are assuming the mortgage (not what happens in a Subject To) the original lender still holds this property as collateral...and can execute the due on sale clause.  You were not approved by the lender for this loan.  You making the payments of the owners mortgage doesn't make you the owner.  The owner can sign the title over to you, but there is a disconnect between you and the mortgage company...that you don't really want to reconnect.

Finding good RE deals is most definitely solving problems.  If in the process you solve the seller's problems, then great, but that only comes into play with distressed owners (notice I didn't say distressed "properties".), but that only works as a good deal if the results work for you.  Yes, risk is involved.  I prefer to not rationalize the risk controls though.  A risk control is only a "control" if you control it.

As far as the "clock" ticking for CoCR, you start the clock once you start spending money.  CoCR means how long it takes you to recover the cash you spent from the time you started to spend it.  There's only one clock...not to separate ones that you combine in a way that makes the numbers look better.

Investing is long and short term. Returns are both liquid (cash) and locked away (equity). The total returns are not as important as the way you receive it. Liquid has a true value that's 5 times its face value. Locked away has a 1 to 1 value, but is useless until you can convert it to liquid. Until then it has value...but, is just a trophy, and if it is generated at the expense of liquid value, it comes at a high cost...and can disappear at a moments notice...and the REI has little or no control over that event.

By your logic, every investment is based on hope.  You buy a stock, your basing your expected return on a variety of factors, historical data, market conditions, company performance, etc.  You buy a rental, you based it on a variety of factors, vacancies, expenses, rent, etc.  In this scenario, I've stated what my projections are and based my analysis.  

You then state that unless you assume the mortgage, the lender still has collateral on the property.  That's true for anybody with a mortgage...  Can nobody evict a tenant if they have a mortgage on it? The due on sale clause is a well known risk risk.  And, the likelihood that it will be called when it's being paid and the rates are as low as they are are very low.  That's a factor always considered with a subject-to deal.  So is your point you don't agree with any subject to deal?

Distressed properties and/or distressed owners are both great sources for good real estate deals.  I don't understand what you're trying to say there.  Every investment has risk and will always have factors outside of your control. You try to eliminate or minimize what you can and decide to accept or not what you cannot control.

As far as cash on cash return, I refer again to my example of calculating cash on cash return to a house needing a remodel. What if you have a BRRRR that takes a year. Do you calculate your CoCR as zero? No, when you go to refinance, you determine how much money you ultimately left in the deal, determine your net income for a year period it is to be rented and calculate your return. Sure, you could argue another formula factoring in a larger time frame could be more useful, but that's true anytime. There's a reason CoCR is used as the primary way to analyze single family rental deals.

Finally, your statement that cash is more valuable than equity... I agree. That's one big reason people find subject-to appealing. You can put up less cash for a property freeing it up for other investments.

@Brian C. I don’t know if anyone has brought this up, but the lender may not permit sale of property. It could potentially demand the note. Have you thought about working to assume the mortgage with the lender? Everything else really is a best case scenario with a lot of “Ifs”. Don’t complicate it, keep it simple.

The current owners have bigger problems than lack of money. That is easy to fix by working. It is a matter of character. And if that is lacking consider the consequences it can have on a mutual transaction. There are easier deals out there as well without the headaches. Good luck!

@Brian C. @Joe Villeneuve

Brian, I’m not sure what experience you have in real estate, but please take this the way it’s meant and not be offended. Your first mistake is posting a possible deal on here and asking for feedback and then attacking those that give you feedback. Joe is a pretty intelligent dude and is right on with most of his comments.

Your theory on how to calculate cash on cash return was used to show a positive mark on this deal while failing to point out you will have negative cash flow for 12 months thus making your CoC return in year 1 NEGATIVE.

And you are off base with your statement that every real estate deal is based on hope like this one. Many investors on here have developed a strategy to evaluate a property to mitigate risk and be successful. That doesn’t solve everything, but experience sure as heck helps reduce the risk factor and we underwrite to account for worst case scenarios. Then if the numbers make sense we do the deal. Your whole deal is based completely and solely on hope that everything goes the way you want it and you have 0 assurance that any of this will work out. Your worst case scenario is you drop 14k year one, then this guy doesn’t move out and doesn’t pay rent so you start dropping 1200 a month again in year 2. While you try to evict, this guy gets a lawyer through public assistance and he ties you and this property up in civil litigation for 12 months and then you ultimately lose in court and have 0 to show for it. Now if you win in court, you spent 14k year 1, 14k year 2 and then 15-20k in attorney fees and then the guy is pissed he lost and he destroys your house and you dump 30-35k into it to be rentable again. All in all you now spent around 80k and your still negative cash flow!

And I don't buy your cash flow number either with a 180k mortgage, HOA, insurance, water, cap ex, vacancy loss etc. I think you are using what @brandon Turner refers to as "lying" cash flow instead of "real/true" cash flow

That being worst case scenario, if you are ok with that and the numbers still work for you, jump into the deal and each one of us will pull for you to be successful.

But, can you not just find a house without all the risk and positively cash flow year 1? This deal makes no sense to me at all. While I appreciate you being creative and hustling, there are better deals to be had out there.

Best of luck to you and I hope this works out for you, I really do! I guess I just feel a duty to give honest feedback when a deal looks really bad! We’ve all made mistakes along the way and most of us wish we had this platform before some of those mistakes.

Originally posted by @Todd Pultz :

@Brian C. @Joe Villeneuve

Brian, I’m not sure what experience you have in real estate, but please take this the way it’s meant and not be offended. Your first mistake is posting a possible deal on here and asking for feedback and then attacking those that give you feedback. Joe is a pretty intelligent dude and is right on with most of his comments.

Your theory on how to calculate cash on cash return was used to show a positive mark on this deal while failing to point out you will have negative cash flow for 12 months thus making your CoC return in year 1 NEGATIVE.

And you are off base with your statement that every real estate deal is based on hope like this one. Many investors on here have developed a strategy to evaluate a property to mitigate risk and be successful. That doesn’t solve everything, but experience sure as heck helps reduce the risk factor and we underwrite to account for worst case scenarios. Then if the numbers make sense we do the deal. Your whole deal is based completely and solely on hope that everything goes the way you want it and you have 0 assurance that any of this will work out. Your worst case scenario is you drop 14k year one, then this guy doesn’t move out and doesn’t pay rent so you start dropping 1200 a month again in year 2. While you try to evict, this guy gets a lawyer through public assistance and he ties you and this property up in civil litigation for 12 months and then you ultimately lose in court and have 0 to show for it. Now if you win in court, you spent 14k year 1, 14k year 2 and then 15-20k in attorney fees and then the guy is pissed he lost and he destroys your house and you dump 30-35k into it to be rentable again. All in all you now spent around 80k and your still negative cash flow!

And I don't buy your cash flow number either with a 180k mortgage, HOA, insurance, water, cap ex, vacancy loss etc. I think you are using what @brandon Turner refers to as "lying" cash flow instead of "real/true" cash flow

That being worst case scenario, if you are ok with that and the numbers still work for you, jump into the deal and each one of us will pull for you to be successful.

But, can you not just find a house without all the risk and positively cash flow year 1? This deal makes no sense to me at all. While I appreciate you being creative and hustling, there are better deals to be had out there.

Best of luck to you and I hope this works out for you, I really do! I guess I just feel a duty to give honest feedback when a deal looks really bad! We’ve all made mistakes along the way and most of us wish we had this platform before some of those mistakes.

 Well said.  Very well said.

Rationalization is the most expensive word in the REI vocabulary. This is a great (or not so great...depending on how you look at it) example of it.

Originally posted by @Todd Pultz :

@Brian C. @Joe Villeneuve

Brian, I’m not sure what experience you have in real estate, but please take this the way it’s meant and not be offended. Your first mistake is posting a possible deal on here and asking for feedback and then attacking those that give you feedback. Joe is a pretty intelligent dude and is right on with most of his comments.

Your theory on how to calculate cash on cash return was used to show a positive mark on this deal while failing to point out you will have negative cash flow for 12 months thus making your CoC return in year 1 NEGATIVE.

And you are off base with your statement that every real estate deal is based on hope like this one. Many investors on here have developed a strategy to evaluate a property to mitigate risk and be successful. That doesn’t solve everything, but experience sure as heck helps reduce the risk factor and we underwrite to account for worst case scenarios. Then if the numbers make sense we do the deal. Your whole deal is based completely and solely on hope that everything goes the way you want it and you have 0 assurance that any of this will work out. Your worst case scenario is you drop 14k year one, then this guy doesn’t move out and doesn’t pay rent so you start dropping 1200 a month again in year 2. While you try to evict, this guy gets a lawyer through public assistance and he ties you and this property up in civil litigation for 12 months and then you ultimately lose in court and have 0 to show for it. Now if you win in court, you spent 14k year 1, 14k year 2 and then 15-20k in attorney fees and then the guy is pissed he lost and he destroys your house and you dump 30-35k into it to be rentable again. All in all you now spent around 80k and your still negative cash flow!

And I don't buy your cash flow number either with a 180k mortgage, HOA, insurance, water, cap ex, vacancy loss etc. I think you are using what @brandon Turner refers to as "lying" cash flow instead of "real/true" cash flow

That being worst case scenario, if you are ok with that and the numbers still work for you, jump into the deal and each one of us will pull for you to be successful.

But, can you not just find a house without all the risk and positively cash flow year 1? This deal makes no sense to me at all. While I appreciate you being creative and hustling, there are better deals to be had out there.

Best of luck to you and I hope this works out for you, I really do! I guess I just feel a duty to give honest feedback when a deal looks really bad! We’ve all made mistakes along the way and most of us wish we had this platform before some of those mistakes.

Did I get offended when I was equated to being the sellers "sugar daddy"?  Yes.  Maybe I'm off, but I don't think many people read that very well.  To me it came across more of talking down to rather than trying to help. 

And yes, I agree that real estate investing aren't based on hope. My point was that using his logic, all investing is hope because there are some risks you can't control, and have to decide whether to accept them or not, and I've decided to accept some risk. It's based on a variety of factors which I felt I explained. I still don't know what the "hope" that my analysis is based on? And in regards to my numbers I feel pretty good about them. I've been renting properties in the area for about 7 years now, manage them myself, including maintenance. I've only had about two months of vacancies across all properties during this time. It's also a newer home so shouldn't need much maintenance. 180k @ 3.5% interest = $648.36 (PI) + 191 (TI) + 95 (HOA) + 200 (Vacancy and expenses) = 1134.

In regards to the CoCR, yes, I acknowledged that the first year will have negative cash. And maybe it wasn't clear, but I was calculating based on a year time frame following when rent collections start, acknowledging that this will not occur for potentially the first 18 months.  But you will technically be negative cash in almost any investment the first year. Buying a rental property the traditional way, for example, with 20% down, you lose money the first year... and the second year, and so on... If someone puts 50K down on a home, at a 10% CoCR, they're still negative 45K for that year. That doesn't mean it's a bad investment, but the CoCR can help you determine when you can anticipate recouping all your costs back, and compare to other investments. So,at at 29% CoCR, calculated a year following the investment, I can roughly plan on it taking little less than 4.5 years to recoup the money invested from when it was initially purchased.  Or, in the eviction scenario, roughly 7 years. The CoCR statements came across like he was picking on the method because it didn't fit into his box on how to use it, therefore it's wrong.  

I appreciate everyone's input, and apologize to @Joe Villeneuve if it wasn't meant to come across as condescending, but that's how I took it. 

@Brian C. Sounds like you already had it figured it out and didn’t need to post. If your numbers work they work, do the deal.

However, your justification paragraph shows how much you have to learn in real estate and unless your ready to be a sponge and soak up the knowledge that so many experts have on here, these forums won’t help you. I don’t claim to be an expert, but I have pretty good experience. With that said, let me explain to you how your statement on cash on cash return in your latest post was wrong..........a few examples

Many investors use creative financing including owner financing. Often times we get into owner financing with no cash down thus making the CoC return infinite so long as the property is cash flowing

Then let's use rehab example....I get HML for purchase and rehab, but need 10% gap and holding funding. I use a passive investor to fund that gap. I again have 0 cash in the deal and my cocr is infinite

Now let’s do a recent deal we did. We purchased 21 unit at 295k at 90% leverage. Needed 31k to close so we used a passive investor to fund the gap. Property already cash flowed. Raised rents, repaired and refinanced at 6 months with appraisal of 650k. Cocr was infinite because we had 0 cash in the deal after taking out first and investor we pocketed roughly 100k.

So your comment that almost all real estate deals are negative cash flow the first year is inaccurate. Actually the typical investor tries to brrrr in some fashion so they have 0 cash in at 6 months. We don’t want to leave cash in more than 6 months. Sometimes we do, but that’s not the goal.

Not trying to beat you up Brian, but you keep making inaccurate statements attempting to justify your deal.

Originally posted by @Todd Pultz :

@Brian C. Sounds like you already had it figured it out and didn’t need to post. If your numbers work they work, do the deal.

However, your justification paragraph shows how much you have to learn in real estate and unless your ready to be a sponge and soak up the knowledge that so many experts have on here, these forums won’t help you. I don’t claim to be an expert, but I have pretty good experience. With that said, let me explain to you how your statement on cash on cash return in your latest post was wrong..........a few examples

Many investors use creative financing including owner financing. Often times we get into owner financing with no cash down thus making the CoC return infinite so long as the property is cash flowing

Then let's use rehab example....I get HML for purchase and rehab, but need 10% gap and holding funding. I use a passive investor to fund that gap. I again have 0 cash in the deal and my cocr is infinite

Now let’s do a recent deal we did. We purchased 21 unit at 295k at 90% leverage. Needed 31k to close so we used a passive investor to fund the gap. Property already cash flowed. Raised rents, repaired and refinanced at 6 months with appraisal of 650k. Cocr was infinite because we had 0 cash in the deal after taking out first and investor we pocketed roughly 100k.

So your comment that almost all real estate deals are negative cash flow the first year is inaccurate. Actually the typical investor tries to brrrr in some fashion so they have 0 cash in at 6 months. We don’t want to leave cash in more than 6 months. Sometimes we do, but that’s not the goal.

Not trying to beat you up Brian, but you keep making inaccurate statements attempting to justify your deal.

I get that. I personally did a BRRRR last year with an infinite rate of return. I was all in for less than 110k, it appraised for 200k did a cash out refinance and got out more money I invested, within 6 months. I get these deals exist, and would love if I could find more, but that's not the norm for most people. My point was that I think it's fair to say that the majority of real estate deals do not recoup all their money in the first year and therefore calculating beyond the first year is useful. The 20% down example was just an easy, relatable example to show for comparison.

Originally posted by @Todd Pultz :

@Brian C. Sounds like you already had it figured it out and didn’t need to post. If your numbers work they work, do the deal.

However, your justification paragraph shows how much you have to learn in real estate and unless your ready to be a sponge and soak up the knowledge that so many experts have on here, these forums won’t help you. I don’t claim to be an expert, but I have pretty good experience. With that said, let me explain to you how your statement on cash on cash return in your latest post was wrong..........a few examples

Many investors use creative financing including owner financing. Often times we get into owner financing with no cash down thus making the CoC return infinite so long as the property is cash flowing

Then let's use rehab example....I get HML for purchase and rehab, but need 10% gap and holding funding. I use a passive investor to fund that gap. I again have 0 cash in the deal and my cocr is infinite

Now let’s do a recent deal we did. We purchased 21 unit at 295k at 90% leverage. Needed 31k to close so we used a passive investor to fund the gap. Property already cash flowed. Raised rents, repaired and refinanced at 6 months with appraisal of 650k. Cocr was infinite because we had 0 cash in the deal after taking out first and investor we pocketed roughly 100k.

So your comment that almost all real estate deals are negative cash flow the first year is inaccurate. Actually the typical investor tries to brrrr in some fashion so they have 0 cash in at 6 months. We don’t want to leave cash in more than 6 months. Sometimes we do, but that’s not the goal.

Not trying to beat you up Brian, but you keep making inaccurate statements attempting to justify your deal.

 What were the inaccurate statements to justify the deal? 

@Brian C.

What I am missing (and I assume others) is what are you starting with?

A house with 40K in equity.. OK great

The bank still is owed a monthly mortgage or they will own the right to foreclose (ignoring Due on sale for this discussion). The seller can't pay their mortgage payment, so you are "assuming that debt".

Someone owes the bank monthly, if they can't afford the bank note and are looking not to get kicked out, you are taking over the monthly debt. Lets say you are now paying $1200 a month to keep them from getting kicked out. They can't afford to move or even sell a property with 40K equity today. Is their position going to be increased in 12 months or are you now picking up the responsibility to foreclose? 

Assuming they leave in 12 months and say "Thanks!" The bank is still owed 180K. If they walk, they aren't keeping their name on the mortgage, are you refinancing? 

@Brian C. Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate, but you said that because it helps you feel better about your deal. And your last post said it was fair to assume most real estate deals don’t recoup their money in the first year. Again, inaccurate. Quit using broad statements. We have closed a dozen multi-family deals this year and all were 0 cash in and all refinanced in 6-8 months pulling cash out.

Your a brick wall man and you got it all figured out! I say that out of love. But until, you open your ears and truly listen and hear things without your pride lens on, you will never reach your maximum potential.

If your an expert, post advice, but if your not post questions like you did. If you post questions have an open mind to the feedback.

Good luck to you man, I’m going to hop off this thread

Originally posted by @Mike Cumbie :

@Brian C.

What I am missing (and I assume others) is what are you starting with?

A house with 40K in equity.. OK great

The bank still is owed a monthly mortgage or they will own the right to foreclose (ignoring Due on sale for this discussion). The seller can't pay their mortgage payment, so you are "assuming that debt".

Someone owes the bank monthly, if they can't afford the bank note and are looking not to get kicked out, you are taking over the monthly debt. Lets say you are now paying $1200 a month to keep them from getting kicked out. They can't afford to move or even sell a property with 40K equity today. Is their position going to be increased in 12 months or are you now picking up the responsibility to foreclose? 

Assuming they leave in 12 months and say "Thanks!" The bank is still owed 180K. If they walk, they aren't keeping their name on the mortgage, are you refinancing? 

So the appeal is, I walk into a house with 40K equity in a good neighborhood and for a $14,400 cost spread out over a year. This means less cash out of pocket, I have the benefit of subject-to where I own the house, but no mortgage in my name. If the tenant walked out after 12 months, great, now I can go find a tenant I can vet.  I now own a turn key property and didn't have to pay any lender fees, etc., I have a great interest rate without it being in my name and I put little money down.  If I needed to refinance, I could, but I'd probably keep it in their name until a point I wanted to do a cash out refinance or something.  

If you could right now acquire a low maintenance, desirable house for 14,400 with 40k in equity, I think most investors would, maybe not?  The question is, is it worth  potential headache and added costs of the difficulties with the previous owner, now tenant.  I get the margins aren't that big, but decent cash flow (granted, not immediate), instant equity and adding a property to my portfolio at the cost of significantly less than the profits the other rentals kick off every month for a year or so seems worth considering to me. 

@Brian C.

The seller will have a $1200 hit on their DTI ratio a month until you take it. If they want to buy a house, car, motorcycle or anything else that tracks their credit, they are going to be told "Um no, you have too much debt". When asking "Huh What". The answer is going to be "You have a $1200 a month mortgage on 123 Main street". "No $100 a month 4 Wheeler for you." (Even while still living there)

They will challenge the lender and show you have title. The lender will take about 4 minutes to send you a demand for payment or they are foreclosing on their loan. 

If you feel it is a good plan, I am by no means saying don't do it. I honestly hope it works out, but as a devils advocate I have to at least point out my thoughts. 

Good Luck!

Originally posted by @Todd Pultz :

@Brian C. Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate, but you said that because it helps you feel better about your deal. And your last post said it was fair to assume most real estate deals don’t recoup their money in the first year. Again, inaccurate. Quit using broad statements. We have closed a dozen multi-family deals this year and all were 0 cash in and all refinanced in 6-8 months pulling cash out.

Your a brick wall man and you got it all figured out! I say that out of love. But until, you open your ears and truly listen and hear things without your pride lens on, you will never reach your maximum potential.

If your an expert, post advice, but if your not post questions like you did. If you post questions have an open mind to the feedback.

Good luck to you man, I’m going to hop off this thread

 

"Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate"  Here's my statement: "But you will technically be negative cash in almost any investment the first year..."  I then stated the example that on a positive 10% return on 50k the first year, you're still negative total cash of 45k for that first year, you put in 50k and got back 5k.  That's not a negative cash flow.  There's a difference between cash flow and total cash invested and recouped. Yes, there are absolutely investments, such as some BRRRRs that do recoup 100% of cash invested within the first year.  But a 100%+ return in the first year on an investment is nowhere near the norm of a typical investment.  

I've never had an investment have negative cash flow.  This is why I made this post, because this one would be the first if I went through with it, out of my comfort zone, but only for the first year.  Would you rather have negative cash flow for the first year followed by 17% - 30% returns every year following, or a deal with a positive cash flow of 10% every year?  



 

Originally posted by @Mike Cumbie :

@Brian C.

The seller will have a $1200 hit on their DTI ratio a month until you take it. If they want to buy a house, car, motorcycle or anything else that tracks their credit, they are going to be told "Um no, you have too much debt". When asking "Huh What". The answer is going to be "You have a $1200 a month mortgage on 123 Main street". "No $100 a month 4 Wheeler for you." (Even while still living there)

They will challenge the lender and show you have title. The lender will take about 4 minutes to send you a demand for payment or they are foreclosing on their loan. 

If you feel it is a good plan, I am by no means saying don't do it. I honestly hope it works out, but as a devils advocate I have to at least point out my thoughts. 

Good Luck!

That's a god point. I'm familiar with the due on sale clause, which to be honest, I wasn't too concerned with. But I didn't think of the previous owner going to the lender and that trigger calling the loan due. I have considered refinancing it upon assuming it, but the LTV probably wouldn't be good enough to be able to do that without putting some additional money into it, which starts to defeat the point. Thanks!

Originally posted by @Brian C. :

Originally posted by @Todd Pultz:

@Brian C. Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate, but you said that because it helps you feel better about your deal. And your last post said it was fair to assume most real estate deals don’t recoup their money in the first year. Again, inaccurate. Quit using broad statements. We have closed a dozen multi-family deals this year and all were 0 cash in and all refinanced in 6-8 months pulling cash out.

Your a brick wall man and you got it all figured out! I say that out of love. But until, you open your ears and truly listen and hear things without your pride lens on, you will never reach your maximum potential.

If your an expert, post advice, but if your not post questions like you did. If you post questions have an open mind to the feedback.

Good luck to you man, I’m going to hop off this thread

 

"Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate"  Here's my statement: "But you will technically be negative cash in almost any investment the first year..."  I then stated the example that on a positive 10% return on 50k the first year, you're still negative total cash of 45k for that first year, you put in 50k and got back 5k.  That's not a negative cash flow.  There's a difference between cash flow and total cash invested and recouped. Yes, there are absolutely investments, such as some BRRRRs that do recoup 100% of cash invested within the first year.  But a 100%+ return in the first year on an investment is nowhere near the norm of a typical investment.  

I've never had an investment have negative cash flow.  This is why I made this post, because this one would be the first if I went through with it, out of my comfort zone, but only for the first year.  Would you rather have negative cash flow for the first year followed by 17% - 30% returns every year following, or a deal with a positive cash flow of 10% every year?  



 

I'll answer the last one first. I'd rather have clear title and a simple deal for 30% COC, which isn't that hard to do, even in SFR.

Second, "cash negative" doesn't really mean anything, because you've exchanged that cash for something of value. If I put down $50k on a $250k property, I haven't lost $50k. I've bought 20% of that property (or more) with that money. I still have $50k, just in a different form. Then I start renting it. If I get $5k in profit, I'm not at -$45k, I'm at +$55k.

I'm not an accountant (though I am taking a class in Fundamentals of Accounting right now), but you're doing some financial gymnastics to make this sound like a good deal. 

If I had this fall in my lap, I'd forget the sub-to. They owe $180k and need $15k to live for the next year? Cool, offer $195k as a straight up sale, and tell them to vacate.

Originally  posted by @Colin Reid :

Originally posted by @Brian C.:

Originally posted by @Todd Pultz:

@Brian C. Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate, but you said that because it helps you feel better about your deal. And your last post said it was fair to assume most real estate deals don’t recoup their money in the first year. Again, inaccurate. Quit using broad statements. We have closed a dozen multi-family deals this year and all were 0 cash in and all refinanced in 6-8 months pulling cash out.

Your a brick wall man and you got it all figured out! I say that out of love. But until, you open your ears and truly listen and hear things without your pride lens on, you will never reach your maximum potential.

If your an expert, post advice, but if your not post questions like you did. If you post questions have an open mind to the feedback.

Good luck to you man, I’m going to hop off this thread

 

"Your statement was that almost every investment will be negative cash flow in the first year! Completely inaccurate"  Here's my statement: "But you will technically be negative cash in almost any investment the first year..."  I then stated the example that on a positive 10% return on 50k the first year, you're still negative total cash of 45k for that first year, you put in 50k and got back 5k.  That's not a negative cash flow.  There's a difference between cash flow and total cash invested and recouped. Yes, there are absolutely investments, such as some BRRRRs that do recoup 100% of cash invested within the first year.  But a 100%+ return in the first year on an investment is nowhere near the norm of a typical investment.  

I've never had an investment have negative cash flow.  This is why I made this post, because this one would be the first if I went through with it, out of my comfort zone, but only for the first year.  Would you rather have negative cash flow for the first year followed by 17% - 30% returns every year following, or a deal with a positive cash flow of 10% every year?  



 

I'll answer the last one first. I'd rather have clear title and a simple deal for 30% COC, which isn't that hard to do, even in SFR.

Second, "cash negative" doesn't really mean anything, because you've exchanged that cash for something of value. If I put down $50k on a $250k property, I haven't lost $50k. I've bought 20% of that property (or more) with that money. I still have $50k, just in a different form. Then I start renting it. If I get $5k in profit, I'm not at -$45k, I'm at +$55k.

I'm not an accountant (though I am taking a class in Fundamentals of Accounting right now), but you're doing some financial gymnastics to make this sound like a good deal. 

If I had this fall in my lap, I'd forget the sub-to. They owe $180k and need $15k to live for the next year? Cool, offer $195k as a straight up sale, and tell them to vacate.

I know there's a lot of back and forth, but your comment about the negative cash flow was the point I was trying to make. Part of the argument for it not being a good deal was said because it's cash negative.  My argument was most investments are technically cash negative during the first year, doesn't meant that's bad because you still have the equity that cash gave you.

As far as the "gymnastics" my post must obviously not be clear... the numbers are just a typical CoCR calculation of the first year following either the first year or 18 months, understanding that there's no cash flow up front. It's like asking would you invest 14k now for a return that won't actually start until a year from now.  

The reason I wouldn't just offer the 195 is because they wanted to stay for another year in the property and that would be the only way they would agree to sell under market value and at subject to.   It's the big reason I posted about it because it's seems like the biggest risk.  If they are insisting in staying there for the next year, they're probably not going to want to leave after the year.  With a standard sale, it would be more of a "standard" eviction.  But, because if it being subject-to, my guess was there might be some more nuance to it I was wondering if anyone had any insights to.

I would not invest now for the promise of a return in a year. I'd invest in something else that gets me a return now. So there's one reason I think this is a bad deal.

Them staying in the property would be unacceptable to me. You're offering them a way out of their predicament, take it or leave it. They don't have a lot of chips to bargain with. Either they leave, or you don't buy, simple as that. They need a roof over their heads, and the extra cash is to compensate for that. They don't want that, they want to live in their house for free. That's a red flag. Frankly, I wouldn't even accept rent from them after the sale, because it doesn't sound like they'd meet my criteria.

I think your posts have been very clear. We all understand what you're trying to do. We all think it's a bad deal. I've been in this position, trying to rationalize a purchase (not always real estate, either) by contorting the math to show a profit. People tell me it won't work, and I show them my numerical pretzel I've created and press forward with the purchase. Aannnnd they're almost always right. I can count on one hand the times I ignored advice from one expert, let alone a whole forum, and still made money. You asked for advice, and that's what was given. You were really looking for validation, and this doesn't seem to be the crowd for that.