If you have ever heard the term, “Subject To…” investing as applied to real estate, you most likely have wondered exactly what it meant. This article should help clear the air, and give you a foundation of knowledge to build on in the area of “Subject To…” investing.

First, I’ll give you a clear, working definition of “subject to…” investing. Simply stated, “subject to…” means that you buy, or take control of, a property “subject to…” the existing financing (mortgage, deed of trust, or home equity loan) remaining in place in the seller’s name. An example should help make this clear.

Let’s say that you receive a call from a motivated seller, Mr. Seller. He tells you that he must sell his house because he has been relocated to Peru, and he has no time to list it with a Realtor. Mr. Seller also tells you that he owes about $100,000 on his mortgage, his payments are about $900 per month, including principal, interest, and taxes. Even though you are only just beginning real estate investing, you know the estimated market value of Mr. Seller’s home is about $130,000. Being an astute investor, you smell a potential deal.

You rush over to Mr. Seller’s home. It doesn’t matter in the least that you are just a beginning real esatet investor. After all, he needs to sell now. After letting him show you around, you sit down at his kitchen table. Here is what you say. “Mr. Seller, I can take over your mortgage payments. I will start making them and go right on making them every month until I get the house sold. This could take one month, or it could take years… there’s just no way to know for sure.

“The only promise I can make is that I will make the mortgage payments no matter what. The mortgage will remain in your name the entire time, however long it takes. We can begin as soon as you are ready to move.”

Mr. Seller asks if you can give him some of his equity in the form of cash to help him with the move. Even someone with little investing experience can negotiate an item like this. After going back and forth a couple of times, the two of you agree on $3,000, which you will pay to Mr. Seller the day he moves out.

So, what do you have? You have a house with an estimated value of $130,000 that you will wind up paying about $103,000 for when all is said and done. You have a payment of $900 per month. Since you don't have much cash left, there's something you must do right away… you must start marketing for a tenant buyer.

So, you place an ad in your local paper, and put up a few signs in Mr. Seller’s neighborhood: “Lease to Own – Bruised Credit OK.” That should get your phone ringing. After screening out a few bad apples, you find a young couple with good jobs and good income who went through a brief period of financial trouble a year or two ago. You explain to them that even though you are just beginning real estate investing, you think you can help them.

You offer to lease them the home with a 12 month option to buy it. Their monthly payment will be $1,200, and the purchase price will be $135,000. They will also give you a non-refundable option fee of $5,000. It doesn’t matter that you don't have much experience- you can certainly see what you've just accomplished.

You have a monthly positive cash flow of $300 - the difference between the $900 you are paying to Mr. Seller’s mortgage company and the $1,200 the young couple is paying you. You have also put $2,000 cash into your pocket right now – the difference between the $3,000 cash you gave Mr. seller and the $5,000 cash the young couple gave you. When the young couple exercises their option to buy, you will also pocket $32,000 - the difference between your purchase price of $103,000 and the price they pay you, $135,000. Not too bad for a beginner!

During the 12 months the young couple is leasing the home from you, you will go to work, making contacts with potential lenders on their behalf. They may or may not exercise their option at the end of the year, but you should do everything in your power to help them qualify for a mortgage so they can exercise it if they want to. If they don’t exercise their option, you simply begin the process again with a new tenant buyer. You are smart, and you are well on the road to successful real estate investing.

This article has given you a clear definition and example of “Subject To…” investing. Is there any reason you can’t go out and put together a deal like this. Certainly, there is a lot more to learn, but now at least you have a foundation to build on. “Subject To…” is definitely a tactic you should have in your real estate investing toolkit.