Subject-to deals are my favorite types of deal to close these days. That’s because I’m now in a “buy and hold” type of mode with most of my properties. Early on in my real estate career I did a lot of wholesaling because I needed cash, but now I want to create cash flow and long term wealth.
However, when it comes to evaluating a subject-to deal, most people have no idea what the numbers should be and that’s what I’m going to share with you today. First off, before you evaluate a potential sub-2 deal you need to know what your end goal is.
For example, is your end goal to quickly sell to a tenant/buyer? Or is your end goal to hold onto the property for the next 20 years? If your end goal is to sell to a tenant/buyer then I want at least $30,000 on the backend when the property sells and at least $100 a month in positive cash flow.
So if I know I can sell a house for $200,000…
Then the most I’ll want to take over in payments is $170,000 so I can make my $30,000 on the backend. If the rent is $1,500 a month, I’ll want to have my payments be no more than $1,400 a month. Of course, this is a simplistic example and you should try and get as much equity and cash flow as possible.
But when it comes to a “buy and hold” subject-to deal I tend to evaluate things a little differently. I still try to get as much equity as possible, but I’m more flexible. Heck, if a property is worth $200,000 and I can get it for $200,000 I’ll still do that deal. Why? Because with a subject-to I am getting into the deal without using any of my own money or my own credit – it’s not costing me a cent.
If a property has zero equity it better have at least $200 a month in positive cash flow. The way I see it, if I can get into a deal for no money and have it immediately start churning out $200 a month in cash flow, then I’m doing very well.
Also, other factors in determining if I’ll settle for no equity are the condition of the house, the neighborhood, how likely I think I’ll be able to raise the rents every year and a few other factors.
The bottom line is, make sure you understand your end goal with every deal you do… before you end up doing that deal. If you’re at the point where you’re building a long-term portfolio then focus on cash flow first and worry less about equity. If you need cash and are going to try and flip a property quickly, then equity should be your paramount concern.