How to Make $50K With One Simple Deal

To those who are familiar with the deals we make at my buying and selling entity, $50,000 may seem a bit low. And it is low. But this $50,000 deal was simple and required very little time investment or risk on our part.

In this case, we’re looking at a subject-to deal. This isn’t necessarily better or worse than the sandwich lease deals we usually do—there are pros and cons to each—but if you know how to structure it correctly, it can be a great way to make a real estate investment with no money down, while maintaining the additional benefits of ownership subject-to deals haver over sandwich leases.

Towards the end of this post, I’m going to include some tips on how we structure these deals so that you can be sure you’re minimizing your risk while maximizing your take-home profits.

First, let’s look at the details.

$50k over 36 months

This was an expired property that we found using our automated expired dialing process. The expired dialing process is a system we use to find expireds where we have a program automatically call new expireds and ask them to fill out a form with some info on the house and their situation.

From there, we can sort through all the bad stuff and find only the low-hanging fruit that will make money for our business. It’s a great strategy as it takes practically no time on our end, and I would encourage every real estate professional to look into a similar process.

So, that’s how we found the property. As this was a subject-to, we took over the mortgage with a balance of $157.340. This was at the end of December, and we structure our agreements so that we do not make any payments until 30 days after they sign (minimum, sometimes more)—so, as always, we picked up an extra free month on this property.

The monthly mortgage payment was $1,115 and we ended up selling the house for $189,990. Let’s check out the breakdown of the three paydays below.

Payday #1 was, of course, the down payment. The buyer put $10,500 down, although we only got $6,500 up-front. The rest came in payments of $200 per month over the next 24 months. (This is how these down payments usually work. We’d love to get the entire amount up-front, but that’s just not feasible in most scenarios.)

Payday #2 was the monthly spread. As mentioned above, the mortgage payment was $1,115 per month. We rented this to the buyer for $1,400 per month, giving us a monthly spread of $285. Multiply that by the 36-month term, and payday #2 comes to $10,260.

Payday #3 was the profit (mark up in price) on the sale plus the principal paydown. The mortgage balance was initially $157,340 and we sold the house for $189,900, giving us a profit of $32,560. Of course, we need to subtract the initial down payment of $10,500, so the real profit comes to $22,060.

But there’s also the principal paydown! In this case, the principal paydown was around $200 per month. Multiply that by the 36-month term and you get a total of $7,200. When you add that to the profit from the sale, it comes to a total of $29,260 for payday #3.

If you’ve been keeping up with the numbers, you can see this comes to a nice total profit of $50,000. ($50,020 if we want to be really exact.)

How we do subject-to deals

There’s also one small nuance with subject-to deals that is important to get right, and it has to do with PITI.

You probably know what PITI is, but if not, I’ll explain. PITI stands for principal, interest, taxes, and insurance. These are the four components that make up your monthly expenses when you own a home (and remember that in a subject-to deal, you own the home!).

When you enter into a subject-to deal, three of those are transferred to you by default—the principal, interest, and taxes. But the insurance is not. You need to make sure that the insurance is in your name, and in most cases, you’ll want to set up a new policy to make sure you’re getting the coverage you desire at a rate that you can afford. From an investment standpoint, you need to make sure the insurance rate will allow you to make a profit.

We have a great system for handling this exchange, as the specifics can sometimes get complicated when you’re dealing with the previous owner’s insurance company, banks, and what have you. Here’s how it works.

First, we call our insurance company and tell them to insure the property. We always make sure all of our policies cover replacement costs so we never get caught short in a disaster. We’d recommend doing the same—but that’s ultimately your decision to make.

Next, we have our insurance company send the certificate of insurance to the bank and we specify with the insurance company to bill the bank directly.

Then, we fax the escrow and the authorization to release a letter—which has been signed by the seller—to the bank, allowing us to talk to them with regards to this property. Once they have that, we call them and say, “We’re calling as the management company, and we’re replacing the insurance policy with a new one.”

Once you’ve done this, the bank will have you listed as the management company for the house and they’ll have your company listed as additional insured. So your PITI will continue, although it may adjust slightly based on your new insurance policy. As far as the bank is concerned, you’re the management company!

You can then cancel the original policy or have the seller do it. Or, in some cases, the new policy will handle itself. Just be sure to confirm all is in place and the old policy is canceled—don’t just assume it’s been taken care of done!

Subject-to deals are a great way to get into real estate investing and without having to put any money down. These types of deals can have amazing payouts in the end—this one, at $50,000, was actually on the lower end—but you must get the details right!

So, have you ever done a subject-to deal? What was the outcome? Did it go smoothly? And if not, what was the issue? I’d love to hear about it.

Remember, we are not attorneys or accountants—you should seek out proper professionals in your area.