All Forum Posts by: Andrew Kiel

Ahh, subject to transactions.  My favorite way to buy real estate!  *Disclaimer: I'm not an attorney nor do I play one on TV, this is solely my opinion having done dozens of subject to, wrap, and owner financed transactions*

First, I believe the trust model is very flawed.  This is not a workaround to the due on sale clause.  The moment someone else becomes the beneficiary, you're in violation.  As I understand it, the exception to a due on sale clause by transferring into a trust is: "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property"

The moment you are no longer the beneficiary is the moment you're in violation.  If the loan gets called because you moved it into a trust - the burden of proof will now fall on the owner to prove they did NOT violate.

Let's just pretend you got summoned to court and had to explain yourself to a judge.  Could you convince a competent judge that you structured this transaction for any reason BUT to hide it from the lender?  That is intent to deceive and could be considered fraud.

The bigger issue I have with the trust model of taking a property subject to is how it is often taught by the so called experts.  If you prepare a trust document for someone other than yourself (aka the seller on a deal you're working on) that's practicing law, the first no-no.  Second, you have intent to deceive.  Finally, if you sell one of these to a third party (where you're not the original seller) and they default - really bad.  Do this a few times and you'll almost certainly have your local attorney general breathing down your neck.

Let's take this one step further - in the example given above you sell your house with the beautiful 2.7% 30 year fixed mortgage to a new buyer by doing a wrap or a straight subject to transaction.  Lender calls the loan.  Now what?  You've sold the house - big mess to refinance as you don't own it.  Your buyer will be forced to cash you out OR you must have enough cash to pay off the underlying loan.  If you and your buyer know this in full disclosure - great.  If not, don't do it.

Now, with that said, I've "violated" the due on sale clause many, many times. However, I do it "openly and notoriously" by recording the warranty deed (or in the case of a VA loan, the agreement for sale/contract for deed). When we record the deed, there is clearly no intent to deceive (the lender). Could the loan get called? Yes. Here's the real question: if the loan gets called, can I handle it by refinancing the property? In my case, this is an easy yes. If it's a "no", you may not want to do a subject to transaction.

So again, my opinion here, but in summary: Subject to transactions are great - but do them knowing full well you are in violation of the due on sale clause and you may someday have the loan called.  If you can't easily refinance or this causes you to lose sleep at night, don't do them.  That simple.

I've personally used Justin Seiler with Lending One out of Florida on about 20 purchases over the last year or so. They have a solid DSCR product for 30 year fixed rate financing. Overall, I've been very happy with them and the product. They don't lend in all states but they definitely do lend in Arizona. Seems I can't post the contact info but you can easily look them up on a Google search.

I've had several instances when a seller came back to me years later and asked for some "help" with their old subject-to loan when obtaining new house or car financing. What we've generally found is the new lender will count 25% of the old loan against them (for DTI purposes) IF we can provide documentation. We will provide a letter stating that our entity has been making payments on loan number ## in the amount of $$$ for the last X years, on our letterhead. We also note the date the property was sold and the lender can easily verify recording of the documents. A good lender will be able to use this.

When we buy a house "sub-to" it's always preferred to get power of attorney and access to the seller's online information for the loan payments.  Then just add your bank account for payments.  Many title companies will offer (sometimes insist) that they handle the payments - I don't prefer this as I've had title companies take my payment and NOT make the underlying payment timely - causing late fees and potentially harming seller's credit.

As long as you have a proper deed, you sell the house whenever you want, nothing out of the ordinary happens.

ROE is return on equity, ROI is return on investment.  Both very important calculations to look at, and I've found the ROE is the better one to review after owning a property for a while.  Let's say you put $20,000 down on what was a $200,000 property (at the time of purchase) and the property is now worth $300,000.  Let's also (just for numbers sake) say you get $500 per month ($6000 annual) net on this property.  Your ROI is 30% - pretty good. Your ROE is 5% - not nearly as good (based on $180,000 loan and $300,000 value = $120,000 equity - assumes no principal paydown).  So the question I feel you should be asking as an investor is do I have a better opportunity for that equity somewhere else?  Should I refi some of that equity out for better opportunities?  Should I sell the property and move the money to something that can create better cash flow or appreciation?

There is another very good option.  Seller (your grandparents) can create a note with seller financing and sell the note at the closing.  This of course means you'd need to find a buyer for the note.  But if you construct a lucrative note (say 6%-7% interest with a good loan to value there are plenty of investors (often retirees) that would be thrilled to get that kind of rate of return.  Perhaps even one of your grandparents friends would be interested.  Your competition is basically bank CD's or money markets (Just looked up Bank of America, up to 1 Million deposit will get you the amazing rate of .05%).  If you were a retiree with say, $200,000 in the bank earning .05% - that's $8.33 per month, not even enough for a meal out.  $200,000 invested in a 7% note is $1166.66 per month - think this might make a difference in a retiree's life? 

I think the key to this question is "I am planning to pay an additional $500.00 to $1000.00 toward principal each month."

With that said, I think the 10/1 or 5/1 options are likely your best scenarios.  If you pay down this loan by an additional $500 per month it should pay off in 11 years, 3 months.  An extra $1000 pays down the loan in 7 years, 5 months.  But ultimately, you can take the numbers given above and plug them into an amortization calculator to see which is best given the scenario you lay out, such as applying additional principal.

Get a good CPA that specializes in real estate accounting and tax returns.  TurboTax is great for easy returns but you left that "easy" range on your first or second investment property.  Are you fully utilizing your section 179 depreciation and 199a deductions?  These are significant changes that occurred in 2018 that many CPAs don't even fully understand unless they are specialists.  I seriously doubt TurboTax gets it right - and that is speaking as an ex-Intuit employee.

A really good tax person / accountant / CPA is hard to find, but once you find them they will save you huge amounts of time and money.  Ask other investors, especially if you have a local real estate investors group.

@Jennifer Reddig - This is a wonderful time to be buying right now, ok that's my opinion, but let me add some clarity.  

As @Bobby Hosmermentioned above, rates are still historically very low. Talk of inflation is everywhere, and I agree. You see it going out to dinner, at the gas pump, in the grocery store, or have you even looked at vehicle prices lately?  What better way to keep up with or beat inflation than to lock in a nice low 30 year fixed rate loan (for investment) in the 4%'s?  Yes, the house prices are up but so are rents.

Houses we're buying in Tucson today are making historically AMAZING returns!  With the model we use (long term lease option exit strategy) we are easily seeing $500-800 per month NET cash flow on the right properties.  Granted, this is not as good as a year or so ago, but still a dream compared to 3-5 years back (where $500 per month net was incredibly difficult to find).

As @Sam Ohanesian notes above, if the numbers make sense, it's a good time to buy. You do need to be selective and buy the right properties bases on YOUR model and your numbers. I know you mentioned BRRR method, and those are certainly our there as well.

The last house I purchased (on MLS), was for $245,000 with a payment of under $1200 per month, income is $1895.

One final thing I'd like to note.  I certainly don't have a crystal ball and have no idea if prices will continue to go up, I tend to think they will, but the market will do what the market will do.  The question like to ask is what is my risk and risk tolerance?  If the market does pull back considerably, does it matter if I'm a long term hold investor making 500+ per month?  Can I afford to lower my rent by 10-20%/several hundred dollars per month and still make a profit if the rents really come down?  Right now, I can easily answer yes to both.

Great job in doing your own research and taking the time to form your own opinions!

@Dean Belcher - I generally agree with creating an LLC and transferring title to the LLC once you get a couple of properties; that's a good asset protection strategy. When you do that, get some competent legal help to set up your docs.

As far as the requirements for Air BnB/VRBO, I can't speak for that as I don't use that model.