Subject To vs. Investment Property with 20% Down

[Phil K.]

Hi All,

New investor looking for advice on my first deal. Recently found an off-market with approx 100k in equity off the bat. Initially I was skeptical because if it sounds too good to be true, it probably is. It’s not a distressed property, however the owner is in a unique situation and fully on board with home inspection and contractor rehab estimate (my agent checked the house out and said it’s in great condition, minimal rehab). Ran some checks on HomeSnap and mortgage, taxes, and title all look good, (will confirm with title company/attorney). The original plan was to put 5% down and house hack it. However, due to an outside circumstance, the owner needs to stay in the home for the next year, maybe 2. He’s on board with either doing the sale as a Subject To or an IP and I rent the property back to him in his family until they’re ready to move.

Here's my situation: Current renter, lease is up in July and still looking to pick up 1st house hack. My agent recommended if I can front the cash, buying the off market with 20% down to lock in current interest rates. HomeSnap shows the current loan interest rate at 3.5%. I'm talking with my lending agent Monday to figure out how having 2 loans out at the same time will affect my DTI/credit and what the numbers look like. If I do 20% down, I'd still need to put 5% down for the other house hack that I live in. Under the Subject To, I would house hack for a year or 2 and then move into the off market. So, I'm trying to figure out which deal makes more sense in terms of: 1) Cashflow, 2) What I need for cash reserves. I can easily swing the current mortgage on the off market.

So the question is: Do I pick up the off market with a Subject To with approximately 20-40K or an IP with approx 80K? Does it make sense to tie up that much cash to lock in a lower interest rate assuming the current rate is 3.5%? My RE strategy is to house hack and do buy-and-holds, so I'm leaning towards Subject To. As a newbie, my thought is use local house hacks to cut my teeth, and then buy out of state IPs which could provide better cashflow/ROI than rentals in the Northern VA area.

From my research on Subject To, most of risk is carried by the seller. The biggest risk for the buyer seems to be the Due On Sale clause, but from what I’ve read, in practice this is almost never enforced (I’d still like an exit strategy if this happens). Banks generally only care about getting their monthly payment. My agent’s advice was to lock in the off market and do the IP if I can swing it, both for the lower interest rate and contractually a Subject To will be more complicated, (we’d have to set up a trust.) If not, he said we could still do the deal as a Subject To. Any thoughts are greatly appreciated!