Part of being a real estate investor is knowing how to think outside of
the box- creating a good investment by using your head.

Pop quiz (think about this and answer it before you continue reading):
Is there any way a property that doesn't produce monthly income
for you can still be a good investment?

The answer to this is yes, depending on what your goals are and at what
stage of your investment life you are in.

Normally you would never purchase a property if there was no income to
offset the expense. This is common sense.

But what if the seller were willing to give you their house- with no
money down- and allow the loan to be left in their name while the deed
is transferred into yours.

Sound too good to be true? Not necessarily.

Why would anyone just hand you the keys to their home along with the
deed and walk away with the loan still hanging out there as their
responsibility? After all, it's giving a stranger control of their
credit.

Here are the reasons I have heard: bad memories in the home, job loss,
divorce, wanting to move to a new location, owing more than the house
will sell for, no equity to pay a real estate agent, being transferred
out of town, tired of being a landlord, house needs more work than they
have the money or time for.

When you buy a home with the existing mortgage or mortgages remaining
in place it is called buying a home "subject to." In other words,
subject to the existing encumbrances.

Most mortgages have what's called a "due on sale clause," which
essentially says that if the deed to the house is transferred the bank
can call the note due.

This is a risk you take when you buy properties in this fashion.

I only bring it up in the interest of full disclosure. It has never
happened to me or any of my clients or friends, and we buy this way
very frequently. So do most builders or real estate agents who offer a
guaranteed sale program. If builders and agents had to get loans to
cash out their sellers under these programs they would quickly stop
offering them.

Also, banks like performing assets. As long as the loan is being paid
on time they generally have no concern for who is paying it.

Now that we know one reason to avoid this approach, let's make a list
of the reasons why it's great....

1. It does not affect your debt ratio.

Lenders will often talk about your debt ratio- the amount of money you
have coming in versus the amount of money you have going out, when it
comes to qualifying you for a loan. Homes that you buy using other
people's loans do not factor in or show up on your credit, freeing it
up for use for other things.

2. It requires no money out of pocket.

Most sellers who are willing to enter into a transaction like this are
in a hurry to move on and are usually not motivated by money. I have
never given a seller any money for a home purchased this way. They are
usually happy to have their problem solved.
Also, none of the homes I have purchased subject to were in
foreclosure- they were either fed up landlords or people whose homes
did not sell with real estate agents in a time frame that suited them.

3. It's a great long term investment and tax break.

Let's go back to our earlier question: "Is there any way that a
property that doesn't produce monthly income for you can be a good
investment?"

I have purchased homes "subject to" that rent for exactly the same
amount as the monthly payment. Now, I do have to dip into my savings if
repairs need to be made to the house, and you should always count on
rentals needing repairs. However, I consider these "subject to's"
to be a good deal long-term. What happens as my renter makes the payment
on the loan in the former owner's name every month? The loan
gradually gets paid down. Eventually I have a free and clear home with
no financial risk to myself.

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