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Passive income can be earned by an investor in the housing industry through a number of ways. While there are multiple ways to buy a home, getting the deed is not always easy in certain deals. For a person who is seeking creative ways to buy, learning what is “subject to” real estate deals can be one investing benefit.
Subject to Financing Defined
In a subject to, sometimes called a subject 2 deal, the existing financing that a homeowner has setup is taken over by an investor. This route is basically paying for the mortgage already in place through an agreement with a homeowner. Some investors who seek out new methods of acquiring homes can explore how to buy a house using a subject to option.
How Money is Made Using Subject 2
When an agreement is made between a homeowner and a seller to investor, equity in the home can be an instant profit. The difference between the down payment or purchase price and the equity left in the home could be one way to profit as an investor.
Leasing the property while under contract could also create profit for an investor. The actual difference between the agreed mortgage payment and lease fees earned from renting would be considered profit in a subject 2 real estate deal.
Many investors take ownership of a property for a short period of time and even pay a few payments on the existing mortgage. These investors do claim deed to the property and are free to sell the home for a profit. Investors can sell to another investor using the same subject 2 structure and walk away with an immediate profit.
Risks with Subject to Real Estate
Many lenders have written in a due on sale clause into a mortgage document that prevents someone else from assuming the mortgage. A lender can invoke immediate payment on the rest of the mortgage if suspicion of mortgage assumption is made. Investors often get around this clause by creating a contract with a homeowner that grants the deed, but does not grant the existing mortgage liability.
There is a certain amount of personal liability that a homeowner undertakes when structuring a deal with an investor. If a person who agrees to takeover the payments misses a payment, the credit rating of a property owner could suffer. Because a property owner is tied into the mortgage agreement, he or she could still face a foreclosure due to non-payment of monthly mortgage payments.
Safer Alternatives to Subject to Investing
Passive investors who want to become owners of real estate without the hassle of acquiring a property through alternative strategies can profit from turnkey homes. To learn more about the 3 keys to investing in rental properties passively, click here.