The traditional strategy to purchase real estate is to put 20 percent down and get a mortgage for the balance owed. The only problem with this strategy is that you will eventually run out of money for the down payment. Savvy real estate investors have adopted a new strategy that allows them to purchase a property with no money down. This strategy is called purchasing a property subject-to the existing mortgage. There are some potential legal liability you can face if you purchase a property subject-to.

When a seller has a financial hardship that prevents them from making their mortgage payment, they might be interested in quickly selling their house. As a real estate investor you can purchase this house by agreeing to make their mortgage payments. This allows you to purchase the house without seeking traditional financing that requires you to have a 20 percent down payment. There is already financing in place on the house and you just agree to continue making the mortgage payment. The mortgage remains in the seller’s name which is why it is referred to as purchase a house subject-to. You are purchasing the house subject-to the existing mortgage on the property.

With the recent downturn in the housing economy, home prices and values have dropped throughout the United States. In some states, home values have declined by up to 50 percent. With this decline both homeowners and real estate investors are struggling to remain current on their mortgage payments. Most people are not interested in making mortgage payments when their mortgage is worth tens or hundreds of thousands more than the value of their house. So many homeowners and real estate investors are walking away from properties.

Most real estate investors feel that they have no legal liability on a property that they purchased subject-to because their name is not on the loan. They feel they can stop making payments and allow the bank to foreclose on the property. The problem is that they can still be sued by the state attorney general or the seller. The fact that the real estate investor’s name is not on the mortgage does not resolve them from having legal liability.

With the increase in foreclosures, banks are becoming more aggressive on going after real estate investors that do not make the mortgage payments on properties they purchase subject-to. They are convincing the state attorney general to sue the real estate investor. There have been several recent court decisions against real estate investors that failed to make payments on subject-to properties. If you thought that you had no legal liability when purchasing a property subject-to, think again.

Deciding on your financial goals for your real estate investments is your first step in starting a good business. Do you need steady monthly income? Are you preparing your nest egg for retirement? Are you building up a portfolio to use for your children’s education in upcoming years? To meet your goals, you need to choose the proper method of real estate investment.

One method to make some fast cash, even if you don’t have any money, is locating great deals and selling them to other investors. Real estate investors are always looking for profitable deals, and if you can help them find them, they will either buy the contract from you, or may pay you a finders fee. Check into local real estate investment clubs and organizations for possible partners.

If you are wanting to establish a steady monthly income, the most common investment strategy is buying rental properties. You will need to put on your accountant’s hat, and figure the price of the property and the rental income very carefully. Factor in all of your costs for the mortgage, insurance, taxes, and set aside a repair budget. You want to buy properties which will return more in monthly rental payments than the cost of owning the property. Many times buying less than prime properties and doing minor repairs and cosmetic touch-ups can make a single family home a great rental property. Your own local neighborhood may not be the hottest area for rental properties, so you may need to step into other neighborhoods, and communities to find the right mix of rental prices, and low cost properties.

Rental properties do come with one additional cost, which many investors overlook on their first purchase, their time. Some tenants can be demanding, others are slow to pay, and even others quit paying entirely and must be evicted. Choosing tenants wisely helps to reduce these issues, but you will always have some challenges. If you prefer not dealing with tenants, you may want to explore other options in real estate investing.

Another popular investment strategy is flipping properties. In this strategy you buy properties under market value, possibly because of the quality of the property, and you make the necessary repairs and renovations before selling for a profit. You’ll need a good calculator and a sharp pencil for your budget planning on these deals. You need to take into account all parts of your planned renovations, and all possible costs to make sure the investment is likely to return a sizable profit.

Some real estate investors are in for the long haul, and buy properties to hold onto for a longer period of time, counting on rising prices to increase the value of the property before selling for a higher profit.

Your choice of what real estate investment strategy is best for you can be based upon your available financial resources, income needs, and interests. You may even decide to work with a combination of these methods to fill your real estate investment portfolio. Combining buying rental property, with a long term strategy of selling for a higher price is a common combination investment. Welcome to the exciting world of real estate investment.

Are you looking to start investing in real estate, but don’t have any idea how you are going to finance the properties. The Subject-To deal, is one of many real estate investors favorite tools.

Subject-To is the short way of saying Subject-To the Existing Mortgage being used for financing. As an investor you are looking for deals that allow you to leverage your cash, and to provide you with profit potential. By offering to buy the property by taking over the seller’s existing mortgage, you avoid the expensive costs of real estate commissions, and the pain of getting a new mortgage, which may or may not be approved.

To clarify this, the seller keeps the mortgage in their name, while signing over the deed/ownership of the home to you, the investor. You as the investor agree to make all of the monthly payments on time. Depending on your particular deal, you may be offering the seller some cash up front, or you may be offering to give them a percentage of the profit upon your resale of the home.

There is some risk for the investor in this type of deal. The first area of risk involves the bank or lender. Most of them have a “Due on Sale” clause in their mortgage agreements. With a subject-to deal, you are attempting to side-step this clause, since you now own the property. If the lender becomes aware of the property transfer, they may request that you or the home owner pay off the balance of the loan immediately. This is one critical reason you want to make every payment on time. The quickest way to bring the attention of the mortgage company is to start missing payments.

A secondary area you need to be concerned with, is insurance. Since the insurance is currently in the sellers name, you may not be able to make a claim. Or if you take out new insurance in your name, it will come to the attention of the lender when they receive the notice, which could start you down the “Due on Sale” process. You will need to be creative in taking care of your insurance needs.

Why is the seller going to agree to a subject-to deal? Usually because they have an urgent need to stop making the mortgage payments. Maybe they have relocated and are currently paying two mortgage payments. They may have lost employment and want to be out from under the home payment. They could have a home in a slow market, and want to sell quickly so they can move on to another property or town.

By learning to use subject-to deals, you can extend your ability to buy properties. Instead of buying one property per year, you may be able to acquire many properties each year, by taking over the sellers loans. Having the subject-to process in your bag of options, will give you greater opportunities to expand your real estate investment business.

Zero down? Why would a seller want to walk away from closing with nothing? Well, they wouldn’t, and that brings up the most important point about real estate investing with no downpayment: The seller almost always needs cash at closing, but it doesn’t have to be YOUR cash.

A Zero Down Example
I’m selling a small rental property right now, with payments of $400/month. The buyer has a good credit report, and the $5,000 downpayment covers closing costs and even a foreclosure, if necessary. So at this point, I don’t care where he gets the downpayment. A $6000 cash advance on a low-interest credit card for example, would cost him about $135 per month, and give him enough for the downpayment and his closing costs.

In this case, with rent around $600 per month, he would be okay. In some cases, however, that extra $135 might cause negative cash-flow. So be sure that however you do it, the numbers work. By the way, I would have set the payments at $350, if he had asked, because it’s the price and the interest rate that are important to me.

Other Zero Downpayment Methods
While there are sellers (like myself) that are able to offer terms and low downpayments, usually you have to find a way to get at least 70% of the price to them in cash. Think in terms of how to get a primary loan, then how to raise the money for the remainder. A couple examples follow.

Some banks still do “no doc” loans, meaning they don’t require verification of income, source of downpayment, etc. They generally loan only 70% to 80% of the property value, but if the seller is willing to take a second mortgage from you for the other 20% to 30%, you are in with no money down. The seller gets 70% or 80% in cash, plus payments for years to come. You’ll have two payments, of course, so be sure the numbers work.

You can borrow against your home or other property to come up with downpayment money. If you borrow for a “vacation,” and leave whatever you don’t spend in your checking account for a while, you can use it without violating bankers rules about borrowing for a downpayment.

Even if you live in a small town, there are usually a few “note buyers.” These are investors that buy land contracts, mortgage loans and other “notes” at a discount. If a seller takes a purchase money mortgage from you for $100,000, for example, a note buyer might pay him $85,000 for it. So how does that help you or him?

An example: A seller prices his property at $195,000, and expects to sell it for $180,000. You offer $205,000 in the form of a mortgage for $160,000, and another for $50,000. You have arranged for the sale of the first mortgage at closing for $136,000 to a note buyer. The seller gets that cash now, plus payments from you on the second loan for $50,000. Notice that this adds up to $186,000, which is more than he expected to get out of the deal.

These are just some of the ways you can buy with zero down. Real estate investing is about making the deal work for all parties. Find a way to get what you want, and get the seller what he wants. That is more important than having big cash on hand.