Strategy Sub2 With or Without a Note – Using Other People’s Mortgages

The “Subject-To” Acquisition

The Goal: Take over a property’s existing mortgage payments without a new loan.
Best For: Creative financiers who can find motivated sellers with low equity.
Funding: Minimal cash for potential repairs or fees.
Key to Success: The existing payment (PITI) must be significantly below market rent.

Training: The Advanced “Subject-To” Stack

Mastering Cash Flow by Combining Creative Finance Techniques

The Foundation: Standard “Subject-To” (Sub2)

Concept: You take over the existing mortgage payments from the seller, and the property is transferred to your name “subject to” the existing loan remaining in the seller’s name. This is not a loan assumption. The original mortgage remains, you just get the deed and take over the payments.
The Goal (Recap): Control a property without getting a new bank loan. You benefit from the existing, likely low, interest rate and payment.
The Ideal Candidate: A motivated seller with little equity, facing a hardship (e.g., divorce, job relocation, impending foreclosure), who just needs to stop the financial bleeding.
Critical Rule: The existing PITI (Principal, Interest, Taxes, Insurance) payment must be significantly below the current market rent. This is your positive cash flow engine.

Example: Mortgage PITI = $1,200/month. Market Rent = $1,500/month.
Gross Cash Flow = $300/month.

The Problem: Dealing with Seller Equity

In a standard Sub2, the seller has equity but you aren’t paying for it with a bank loan. How do you compensate them?

The Wrong Way (Monthly Payments): You agree to pay the seller $150/month for their equity.

- Old Cash Flow: $1,500 Rent – $1,200 PITI = $300
- New Cash Flow: $1,500 Rent – $1,200 PITI – $150 to Seller = $150
- Result: You’ve just cut your cash flow in half.

The Advanced Solution: The “Stacked” Strategy

This is the core of the training. Instead of making monthly payments, you use a Promissory Note and immediately create an exit strategy with a Lease Option.

Step 1: Acquire the Property “Subject-To” with a Deferred Note

You get the deed “Subject-To” the existing mortgage.
For the seller’s equity, you do NOT make monthly payments. Instead, you sign a Promissory Note for the equity amount.
The Key Feature: This note has a “No Payment Clause” (e.g., no payments for 60 months). The full balance may be due at the end (a “balloon” payment), or it may start amortizing after the deferral period.

Example (Improved):

You still have the $300/month cash flow from the rent vs. PITI.
You are NOT paying the seller $150/month.
Your Preserved Cash Flow = $300/month.

Step 2: The Immediate Exit – Sell on a Lease Option

You do not hold this property as a long-term rental. You immediately market it as a Rent-to-Own or Lease Option.
Lease Option Basics:

- You find a tenant-buyer who wants to own a home but can’t qualify for a loan now.
- They pay you an option fee (non-refundable, yours to keep).
- They agree to a lease payment that is above market rent.
- They have the option to purchase the home at a pre-set price within a specific time frame (e.g., 2-5 years).

Step 3: The Cash Flow Maximization

Let’s see how this “stack” works financially:

Component	Standard Sub2 w/ Monthly Pmt	Advanced “Stacked” Strategy
1. Acquisition	Sub2 + $150/mo to seller	Sub2 + Promissory Note (Deferred 60 Months)
2. Monthly PITI	($1,200)	($1,200)
3. Monthly Rent	+ $1,500	+ $1,700 (Lease Premium)
4. Pmt to Seller	($150)	$0
5. Monthly Cash Flow	$150	$500
6. Upfront Cash	$0	+$5,000 (Option Fee from Tenant-Buyer)

Why This is a “Better Investment”:

Massive Cash Flow Increase: You go from $150 to $500/month in this example.
Large Upfront Cash: The option fee ($5,000 in the example) is immediate, non-refundable capital you can use for repairs, reserves, or to fund your next deal.
Solves the Balloon Note: The tenant-buyer is contractually obligated to buy the house (usually with a new mortgage) within your option period. When they exercise their option and buy, you use their proceeds to pay off the seller’s promissory note in full. The “balloon payment” is no longer your problem.
You Control the Asset with Minimal Risk: You have a contract to sell the property for more than you owe the seller, locking in your profit.

Action Plan & Key Considerations

Finding the Deal: Use direct mail, bandit signs, and networking to find motivated sellers with low-equity, high-hardship situations.
Due Diligence is CRITICAL:

- Title Search: Ensure there are no other liens (tax liens, HOA liens, second mortgages).
- Loan Due-on-Sale Clause: Understand this risk. Most mortgages have a clause that the full balance becomes due if the property is transferred without the lender’s consent. This is a calculated risk that successful investors manage by keeping the mortgage current, not disturbing the “sleeping giant,” and having insurance.
- Get Expert Help: Use a real estate attorney to draft your Sub2 agreement, promissory note, and lease option contract. Do not use generic online forms.

Finding Tenant-Buyers: Market on rent-to-own listing sites, Facebook Marketplace, and with real estate agents who work with investors.

Conclusion

The goal is not just to acquire a property, but to structure the acquisition in a way that maximizes your cash flow and minimizes your risk and cash outlay.

By moving beyond a simple Sub2 and “stacking” it with a deferred promissory note and an immediate lease option exit, you transform a good deal into a powerful, high-cash-flow investment that funds itself and its own eventual exit.

Disclaimer: This is advanced real estate investing strategy. It involves significant risk, including the due-on-sale clause. You must consult with qualified legal and tax professionals before executing any transaction.

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