Thoughts on a creative investment strategy?

Question

I am looking for feedback on an investment strategy to acquire rental income streams from troubled property owners with $0 invested.

When a leveraged rental property owner runs into trouble making payments and faces a foreclosure, might it be possible to structure a deal legally whereby rights to rent that property can be signed away to an investor, who takes over management and instead of charging a management fee, captures the full rental income every month and out of that pays a fixed amount directly to the lender. In return the owner avoids foreclosure, other loss from investiture they may have made in the property, and retains their ability to realize appreciation in the property over time. I see it as a legal agreement where one investors ends up owning the income stream from the rent payments and the other owns the long term appreciation piece of the investment property. The rental income investor upside is profit from rental income at $0 down, downside is the risk of not being able to rent it and the deal falls apart - in which case the owner potentially goes back to facing foreclosure again.

Since the property is not purchased by the investor its really just an agreement on splitting up the different parts of the investment and responsibilities. If the conditions are right perhaps it's possible for an investor to acquire rental income streams by simply signing the right document with the right troubled property owners?

Thanks for reading! Have a great day

Christopher Brainard · Answer

Hi @Daniel Fogg and welcome to BP!

What you're describing isn't realistic, but is very similar to taking a house subject to the existing financing. In your scenario, there is no benefit for the owner to sign over 'management' of the property to you, as you aren't paying the back payments owed to the mortgage company, they lose any future rent profit, and they lose future appreciation. All around terrible deal for them.

If you research subject to financing, basically, the owner signs over ownership of the house to you. You would need to bring the mortgage current, which tends to cost a relatively small amount of money compared to the ARV of the house. You would then need to remove the existing non-paying tenant, repair/update the property, and then find a new tenant. The challenges for a new investor with this method are three fold.

• This does require money. You will need to catch the mortgage up, pay for repairs, and marketing the property to a new tenant. Personally, we love this method as it generally comes with a very low interest rate and you don't need to obtain a mortgage.
• You need to have sufficient experience that the homeowner trusts you with their house. The homeowner's credit is still on the hook for the loan and they need to be confident that you won't screw them. Typically, homeowners feel comfortable if you can show them that you've done this before and have sufficient financial reserves to maintain their property no matter the circumstances.
• The bank could call the due on sale clause and you would be on the hook to immediately pay off the loan or face foreclosure. I've never seen or had this happen, however, these clauses are written into every loan out there so if the bank wishes, they can do it.

Hope that gives you some info on what you're thinking. If you're looking for ways to acquire property with $0 down, the best way is to find a smoking hot deal and find an money partner. There are also a bunch of other ways (you can get @Brandon Turner's book on Low and No Money Down), but real estate usually requires someone's money to make things work.

-Christopher

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Daniel Fogg · Answer

Thanks for your reply and steering me in the direction of subject to existing financing, i'll look into that and your other suggestions! In my scenario I was hoping the existing owner could retain their future appreciation by retaining ownership (thus not making it an all around bad deal for the existing owner), but that they would forfeit all or most of the rental profits to keep that in place and avoid the foreclosure. Anyway it was fun trying to think of a new strategy and about the different parts of the investment even if it turns out to be unrealistic. I appreciate the sensible and well laid out reply. Cheers!

Thoughts on a creative investment strategy?

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