Have you Purchased a Home w/ Someone Else's Mortgage?

Purchasing a Rental Property #SubTo: A Guide to Benefits and Cons

In my last article I posted…I talked about a recent acquisition in my real estate portfolio, which is an All Women’s Sober Living Home. I didn’t mention how I found it or how I purchased it. Many of you likely haven’t heard of this strategy...and if at the end you’re intrigued, DM me.??

In real estate investing, creative financing strategies are often the key to building wealth. One such strategy that has gained traction is called ‘Subject To’ or SubTo. ‘Subject To’ refers to buying a property subject to the existing mortgage, meaning the seller keeps the loan in their name, but the buyer takes control of the property (deed transfers) and payments. I know what you’re thinking…WHAT? You can do that?

This strategy is particularly appealing to investors looking to build a rental property portfolio without traditional financing. However, while purchasing rental properties SubTo offers several benefits, it also comes with challenges and risks. This article will delve into the advantages and disadvantages of using this approach in the context of rental properties.

What is a SubTo?

A "Subject To" formally known and what I call it, Mirror Wrap, purchase occurs when a buyer takes ownership of a property but leaves the seller’s mortgage in place. Essentially, the buyer agrees to make the monthly payments on the existing mortgage but does not formally assume it. I like to refer to this as an informal assumption. To boil it down…the title of the property transfers to the buyer, but the loan remains in the seller’s name...many of you are thinking perhaps…why?

This strategy is most often used when the seller is motivated to offload the property quickly—perhaps due to financial distress, relocation, avoiding foreclosure, divorce, job loss, etc. It is also not always due to a financial disaster or strain, I have purchased $775,000+ properties that had $200,000+ of equity.

Benefits of Purchasing a Rental Property SubTo

1. Low Initial Investment

???One of the biggest advantages of purchasing a rental home SubTo (Mirror Wrap) is the low out-of-pocket cost. Since you are not taking out a new mortgage, there is no need for a large down payment, closing costs, or traditional loan qualification. You are essentially stepping into the seller’s existing financing arrangement, which can be highly favorable for investors with limited capital. Having completed over 69 SubTo transactions over the past year and a half, the entry fee, aka. initial investment is predominantly less than 10% of the purchase price. In 2023 I even purchased a 2021 build 4/3 in Oregon with $450,000 for just the closing costs, meaning the seller handed me the keys. No cash to the seller, no agent involved.?

2. No Need for Traditional Boring Bank Financing

???Investors who may struggle to qualify for a conventional loan due to credit issues, insufficient income history, or too many existing loans can still acquire rental properties using the SubTo method. This eliminates the lengthy underwriting process and bypasses potential barriers set by banks and lenders including lender fees, appraisals and more nickels and dimes.?

3. Immediate Cash Flow Potential

???If you’re acquiring a rental property that already has tenants in place, you can start generating cash flow immediately. Even if it’s vacant, the lower acquisition cost allows you to rent out the property and generate income without the burden of a new mortgage. In many cases, the monthly mortgage payments and interest rate from the previous owner may be lower than market rates and rents, increasing your profits. My entire portfolio is sub 5% interest rates with 6 properties below 3%...many of which were acquired in 2023, 2024..when interest rates were 7.5%+.

4. Potential for Rapid Portfolio Growth

???Because this strategy does not rely on traditional financing, it allows investors to rapidly acquire multiple properties. You can scale your portfolio without being limited by bank lending terms, credit checks, or debt-to-income ratios. This can be an excellent strategy for investors looking to build wealth through rental properties quickly. Like mentioned before many of my acquisitions are below 10% of the purchase price. Couple that with leveraging Private Money Lenders (PML) who fund the entire entry fee to get into the deal for a return on their money…many times you can get into a deal for little to no money (hint: that is how I purchased the sober living that cash flows $1,100.00 per month…after paying the PML)

5. Helping Distressed Sellers

???Purchasing a property SubTo can be a win-win scenario for both parties. Sellers who are facing foreclosure or financial hardship can offload their property without damaging their credit further, while investors gain an asset. This strategy can also work well in markets where home prices are stagnant or declining, allowing sellers to walk away without negative equity. Many times I am saving sellers from losing their VA entitlements, saving their credit and even saved someone’s life...more on that another time.

Cons of Purchasing a Rental Property SubTo

1. Due-on-Sale Clause Boogeyman

???Most traditional mortgages have a due-on-sale clause, which allows the lender (the option and opportunity) to demand the full loan balance if the property is sold or ownership is transferred. Technically, a SubTo purchase violates this clause, and although it is rare, the bank could call the loan due. If this happens, the buyer would have to either pay off the mortgage in full or refinance the loan, which may not be feasible. However, executing these the correct way mitigates the risk and upon the note being called due, there are strategies to prevent this from happening.?

2. Seller’s Financial Risk

???While the buyer gains control of the property, the seller is still legally responsible for the mortgage. If the buyer fails to make the mortgage payments, it’s the seller’s credit that suffers, and they could face foreclosure. This creates a level of risk and dependency between the buyer and seller, which can complicate the arrangement if either party fails to uphold their end of the deal. This is why trust matters more than the nickels and dimes. Knowing you have a solid operator is critical to the success of the payments.?

3. Limited Control Over Loan Terms

???Since the buyer is taking over an existing mortgage, they are locked into the terms set by the original loan agreement. This means you may be inheriting a higher interest rate or a less favorable loan term than you could obtain through traditional financing. Additionally, if the mortgage is an adjustable-rate loan, your payments could increase over time, which could negatively impact your rental income. Additionally, you can inherit HELOCs or Solar Liens (ew), which potentially are at higher interest only payments.?

Some things to Consider Before Purchasing a Property SubTo..

1. Understand the Mortgage Terms

???Before agreeing to a SubTo deal, thoroughly review the terms of the existing mortgage. Ensure that the interest rate, payment schedule, loan balance, escrow balance and any potential rate adjustments will still allow for profitable rental income. Also, determine whether there are any penalties for early payoff or refinancing. One insane hack that many overlook, is evaluating the insurance cost held in escrow. I replace the policy in every transaction and in one particular instance, I reduced the overall mortgage payment by $180/mo...increasing my cash flow. Meaning…shop your insurance-people.?

2. Title and Property Condition

???As with any real estate purchase, it’s essential to conduct proper due diligence on the property itself. Ensure that the title is clear of liens, unpaid taxes, or legal claims. Also, conduct a thorough inspection of the property to confirm it is in good condition and will not require significant repairs that could eat into your rental income.?

3. Proper Guidance

???Given the complexity of a SubTo transaction, it's critical to consult with an expert who understands this financing method. They can draft the necessary contracts, ensure the transaction complies with state and local laws, and mitigate any potential risks. DM me if you’re ever purchasing a home this way and myself or my transaction coordinator can assist.?

4. Have a Backup Exit Strategy

???Always have a contingency plan in case the rental strategy you choose (STR, LTR, Sober) isn’t working out. You do not want to get into a rental property with one tool on someone else’s debt and fail. I have personally witnessed a deed in lieu of foreclosure… meaning a buyer handed the keys back to the original seller and cost $70,000.00 in the process. Don’t be them.?

Purchasing a rental property SubTo is a powerful tool for real estate investors, offering a way to acquire properties with little upfront cost and without the need for traditional financing. The ability to generate immediate cash flow and rapidly scale a rental portfolio is a major draw for many investors.

However, it’s not without its risks. The due-on-sale clause, the seller’s ongoing responsibility for the mortgage, and potential legal challenges require careful consideration. As with any investment strategy, it’s essential to do thorough research, understand the risks, and consult with professionals before proceeding.

For those willing to navigate these challenges, SubTo investing can be a profitable and creative way to grow a real estate rental business.

DM me if this interests you and you’d like to learn more. I have an entire YouTube (@mooredeals) and Instagram (@moore_deals) about this entire topic.?