Brother in College Co-Signing w/ Buddy for Duplex

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cal91
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Brother in College Co-Signing w/ Buddy for Duplex

Post by cal91 » Tue Sep 12, 2017 10:58 am

My Brother has one more year in college in Utah. He's not sure he'll be in Utah after he graduates, he could be anywhere in the country. He does pretty well and makes roughly 60 K a year from summer sales and is looking to invest his money. I told him to max out his roth IRA, which he'll be doing.

He and his buddy (who makes roughly 80 K a year) he sells with are looking into partnering to buy a duplex in their college town. Neither of them will be living in it, it's just an investment.

The cost is 265,000. 5% down payment = 13,250. Closing costs = 2200, total upfront costs = 15,450.

They're using Lender paid insurance (lender pays PMI in exchange for higher interest rate of 4.5% instead of 3.88%).

He told me that home owners insurance is $50 a month, property tax is $150 a month, so the total payment is $1476 a month.

One side is 4 bdr 1.5 bath and they guess they can get $1400 / month.

Other side is 2 bdr 1 bath and they think they'll get $600 a month.

They've determined from this that the cash flow is $524 a month (rent income minus mortgage payment).

My brother came to me for any advice if it's a good idea or bad idea given this information, and anything he might not be thinking about.

My reply was basically this...

1. Co-signing = not a good idea. Turns a friendship into a stressful relationship. Don't want to be dependant on him filling his portion, fighting over maintenance costs, selling, etc. If you are going to buy, it'd be a lot cleaner buying by yourself.

2. So it's likely he will either sell within a couple years, or be a long-distance landlord. Neither are good options. The first option isn't good because real estate is not a good short term investment. High transaction fees and high volatility make it very likely that it'll be a loss.

3. He didn't factor in maintenance costs. There's real costs and "headache" costs to being a landlord.

4. There will likely be a month every year or so where he doesn't have tenants. He should be conservative in this assumption.

5. If using real estate as an investment, save up enough for 20% down and plan on long term investments. Don't do short term + PMI costs when investing in real estate.

I thought it'd be good to ask the bogleheads what their thoughts are for both him and my advice to him. Any comments/criticism is welcome. Thanks!

chevca
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by chevca » Tue Sep 12, 2017 11:11 am

No way! Co-signing, not staying in the area, how will taxes be handled, maintenance, property manager (?), and all the other issues possible for $500/month... I.E. $250 a piece. It would be quite some time before this was a profitable deal for them. Tell him to pass.

delamer
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by delamer » Tue Sep 12, 2017 12:33 pm

Here is an alternative for someone his age:

http://www.etf.com/docs/IfYouCan.pdf

Sometimes steering people in another direction is the best option.

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Raymond
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Raymond » Tue Sep 12, 2017 1:04 pm

Your brother is a smart guy to be bouncing this idea off of you first before diving in :happy

In his position, I would pass.

You have already covered the reasons to do so - perhaps he could buy an investment property by himself once he gets settled into whatever area he ends up in after graduation, after he maxes out his Roth IRA.
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Derby
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Derby » Tue Sep 12, 2017 2:13 pm

Cash flow is not going to be ~500/month. He hasn't accounted for: vacancy, maintenance, capital expenditures or management.

Nope, nope, nope, nope, nope. This is a horrible idea. If he's not convinced, he should go to the library and pick up a few books on land lording first.
Carpe Diem.

Ruger
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Ruger » Tue Sep 12, 2017 2:22 pm

Absolutely not....for all the reasons already mentioned.
He needs to be absolutely sure what rent he can get....."guessing" and "thinking" aren't sufficient.
It may be less than what he thinks, and then the income would be even less than he has calculated.
For $250 a month, I would invest in something else and something that does not involve another person.

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celia
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by celia » Tue Sep 12, 2017 2:24 pm

What about landscaping maintenance? Even if nothing ever breaks and no-one moves, the lawn has to be mowed and watered. Then he needs liability insurance in case someone falls and sues him.

If he wants to be a landlord, why not wait until after graduation and he has a job. Buy in a place where the real estate has a chance to appreciate.

If he has room in his course schedule, how about taking a class on investing or real estate.
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denovo
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by denovo » Tue Sep 12, 2017 2:47 pm

Show him this thread, I may be biased because I know the author, but this hits many red flags.

viewtopic.php?f=2&t=226980

1. Partner

2. Underestimating costs re maintenance and vacancy.

3. He lacks liquidity, relying on summer jobs , still a student

4. Can't reliably commit to managing it himself since because he's a student whose future prospect is uncertain.

Your brother seems impressive, I don't know many college students who can pull 60k a year in summer work, well at least not legally. Although tax-advantaged space is preferred, there's no sin in taxable investing if you've filled that up.

Does he want to go to grad school? That cash may be handy if mom and dad or uni isn't picking up the tab. Tell him to slow down just a little bit.
Last edited by denovo on Tue Sep 12, 2017 3:12 pm, edited 1 time in total.

deltaneutral83
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by deltaneutral83 » Tue Sep 12, 2017 3:08 pm

This will be a great opportunity for the OP's brother to take a 5 figure sucker punch on the chin and many sleepless nights of stress due to the conditions already laid out (Co-signing/out of town rental/tenants will tear the place up/unexpected vacancy). Tell him it's a horrendous idea but you will be there to support him when the anger/depression sets in inevitably several years after he closes. I don't trust anyone enough outside of who's on my tax return to buy property with.

clarkrl
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by clarkrl » Tue Sep 12, 2017 3:40 pm

Hey guys I'm the brother he was talking about. Thanks for all the advice so far. There are a couple things I want to clarify. I got to BYU in Provo, and the housing market is crazy. There are people moving in and out all the time. $600 a month and $1400 a month are worst case scenarios where if we couldn't get them rented out we'd drop it down to get it filled. Realistically similar residences are renting out for around $800 and $1600 respectively. My brother and I both grew up working a lot of hours for our Dad who's a general contractor and so I do have a lot of hands-on experience and am not worried about not being able to maintain the home, or youtube/call family members if I need more help. I'm also not too worried about the monthly/yearly cash flow. The rent will more than pay for the mortgage and any other expected costs, and we're expecting around $300 a month each.

Some other things: my "buddy" has been graduated in accounting for several years but makes more money doing sales than as an accountant and so he's stuck with it for a while. He actually makes closer to 300k a year. This past summer I actually made roughly 80k. You guys should look up Aptive Environmental and the owner/found Dave Royce if you're curious about the amount of money college students can be making. The point is my partner has done this before with duplex's and is going to do it with/without me. He lives on the same street and isn't going anywhere soon. I have enough saved that I could buy a duplex myself and have actually thought about it, but it still scares me a little and I just don't think I know what I'm doing enough yet. I thought he could be more of a mentor/coach. Even if I don't make that much money or any at all, a lot of this is just a learning experience for me and a chance to get my feet wet. I trust him completely and he's fairly financially savvy.

What I'm mainly worried about is long term. I'm only going to be in Utah for most likely 2 more years, with a SLIGHT chance I'll stay here till 2020-ish. After that I'm not sure how involve/tied down I want to be. He can do the maintenance from his house and we can talk about that and come up with a fair agreement, and as far as finding people to live there I can help with that from out of state. Another concern is the real estate market/debt. We weren't planning on this being a "real estate" investment, more of just a monthly cash-flow thing. But after thinking on it more and talking with my brother I realized its a lot more than just $7500 that I'm risking. I'll have a huge debt. My brother reminded me of what happened to Dave Ramsey and I'm starting to see how similar this is. My parents don't help me financially at all, except for my phone I guess. and I hate debt, that's why I have this job. Last year I made 35k, had to buy a car, and got married and pay for both mine and my wife's tuition's. So far I'm completely debt free and graduating out of pocket, and this year I'll actually have a lot of get-ahead money. But now I'd be getting into way more debt.

Basically my questions are these: how risky is it to owe a lot of money on a home, and if I figured out a way to make me more comfortable with this idea after I left Utah would it be worth trying? for example telling him he has to agree to buy me out when I move or work out some way for him to be more involved than me when I'm gone. I'm open to ideas.

If you guys still thinks its an out-of the question bad idea, what would you recommend? I'm planning on putting a good 20k (maybe 30k depending on if I get a second car or not, and how much to spend on that car) away. My wife owes 15k and graduates in April so we'll probably pay that off, and then we would max out the Roth IRA. I really am interested in investing and don't want to blow all the money I'm making now and set bad habits for the future, but have kind of struggled on just getting started and thought this would be a good way. I've heard quotes like the only investment worse than a bad investment is no investment, and you miss 100% of the shots you don't take.

Whakamole
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Whakamole » Tue Sep 12, 2017 4:28 pm

clarkrl wrote:
Tue Sep 12, 2017 3:40 pm
$600 a month and $1400 a month are worst case scenarios where if we couldn't get them rented out we'd drop it down to get it filled.
I do not think you quite understand the meaning of the term "worst case scenario."

clarkrl
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by clarkrl » Tue Sep 12, 2017 4:42 pm

Sorry not worst case possible, but worst expected case. If we have a hard time getting it filled quickly, there are tons of college students moving in and out all the time and if we lower the price down to $600 it is very likely to get filled within a couple days. I would be the one living there anyways for the first year on the 2 bedroom side, and so worst case would be not renting out the other side, but more realistically renting it out for significantly lower than market prices.

chevca
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by chevca » Tue Sep 12, 2017 4:46 pm

clarkrl wrote:
Tue Sep 12, 2017 3:40 pm
Some other things: my "buddy" has been graduated in accounting for several years but makes more money doing sales than as an accountant and so he's stuck with it for a while. He actually makes closer to 300k a year. This past summer I actually made roughly 80k. You guys should look up Aptive Environmental and the owner/found Dave Royce if you're curious about the amount of money college students can be making. The point is my partner has done this before with duplex's and is going to do it with/without me. He lives on the same street and isn't going anywhere soon. I have enough saved that I could buy a duplex myself and have actually thought about it, but it still scares me a little and I just don't think I know what I'm doing enough yet. I thought he could be more of a mentor/coach. Even if I don't make that much money or any at all, a lot of this is just a learning experience for me and a chance to get my feet wet. I trust him completely and he's fairly financially savvy.

What I'm mainly worried about is long term. I'm only going to be in Utah for most likely 2 more years, with a SLIGHT chance I'll stay here till 2020-ish. After that I'm not sure how involve/tied down I want to be. He can do the maintenance from his house and we can talk about that and come up with a fair agreement, and as far as finding people to live there I can help with that from out of state. Another concern is the real estate market/debt. We weren't planning on this being a "real estate" investment, more of just a monthly cash-flow thing. But after thinking on it more and talking with my brother I realized its a lot more than just $7500 that I'm risking. I'll have a huge debt. My brother reminded me of what happened to Dave Ramsey and I'm starting to see how similar this is. My parents don't help me financially at all, except for my phone I guess. and I hate debt, that's why I have this job. Last year I made 35k, had to buy a car, and got married and pay for both mine and my wife's tuition's. So far I'm completely debt free and graduating out of pocket, and this year I'll actually have a lot of get-ahead money. But now I'd be getting into way more debt.

Basically my questions are these: how risky is it to owe a lot of money on a home, and if I figured out a way to make me more comfortable with this idea after I left Utah would it be worth trying? for example telling him he has to agree to buy me out when I move or work out some way for him to be more involved than me when I'm gone. I'm open to ideas.
Welcome!

I think this part of your explanation/post basically spells out why you shouldn't do this...

Why is he asking you to co-sign? Why do you need to be part owner if you just want him to coach/mentor you on landlording and owning a rental?

Why would you want to take this on for only a two year time frame? Say you get $300/month... for two years that's a whole $7200. Sounds like you can make that in a couple weeks doing sales. Sure, there's potential appreciation too. But, that's not guaranteed either.

If you were to approach the buddy and say, after two years you should buy me out, or do all the work since I'll be out of state, do you think this is a partnership that should even be started?

Taking on a rental home as a two year investment is not a good idea, IMO. That's more of a long term investment that needs time to play out and make it worth it.

It sounds like there are better uses for your money right now like school and the wife's loans. Then just save and invest for a couple years until you guys figure out where you will land.

Bfwolf
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Bfwolf » Tue Sep 12, 2017 4:52 pm

I don't think partnering with somebody you know well is a bad idea.

But your 2 year time frame really gives me pause. This is the kind of investment/job that's probably a lot easier if you're in the area.

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Watty
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Watty » Tue Sep 12, 2017 5:02 pm

One thing that has not been mentioned is that if you co-sign on the rental then you may have difficulty in getting a mortgage if you want to buy a house to live in so be sure to look into that.

That might not be a big deal for you right now but in a few years you might have a kid on the way and not be able to buy a house.

The way the original post used the word "Co-signing" also seems very odd since that is a lot different than actually buying a property with someone and implies that their credit is not good enough to get the loan on their own. It would be best to have a lawyer draw up a business agreement on how this is going to work.

dbr
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by dbr » Tue Sep 12, 2017 5:58 pm

Watty wrote:
Tue Sep 12, 2017 5:02 pm
One thing that has not been mentioned is that if you co-sign on the rental then you may have difficulty in getting a mortgage if you want to buy a house to live in so be sure to look into that.

That might not be a big deal for you right now but in a few years you might have a kid on the way and not be able to buy a house.

The way the original post used the word "Co-signing" also seems very odd since that is a lot different than actually buying a property with someone and implies that their credit is not good enough to get the loan on their own. It would be best to have a lawyer draw up a business agreement on how this is going to work.
Yes, if it really is cosigning that means the brother doesn't actually own the property but is responsible for the debt. This may be misstatement.

clarkrl
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by clarkrl » Tue Sep 12, 2017 6:01 pm

He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.

And yes the 2 year thing is really what makes me paid as well. If it's realistic I'd be fine being in it for the long haul, and he thinks that'd be fine from out of state, I'm just not sure I'm convinced on that part. I'll have to talk with him and set expectations. We've worked really well together in the past and I think we can but if I still don't think it'll work I'll back out.

The other thing I don't think I explained very well was my fear of the market going down and we ended up owing more money on the house than it was actually worth. Hence the "not just a $7500 risk." On the flip side there could be a lot to gain if the market went up. I just haven't researched much about that part of things. That's the actual worst case I'm thinking of.

pintail07
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by pintail07 » Tue Sep 12, 2017 6:40 pm

Never, ever cosign. Reread. Even with very best friends, never, ever. I did it, total worst case happened.

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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by PugetSoundguy » Tue Sep 12, 2017 6:48 pm

The relatively modest likely upside doesn't seem worth all the downsides described above.

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Watty
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Watty » Tue Sep 12, 2017 9:27 pm

clarkrl wrote:
Tue Sep 12, 2017 6:01 pm
He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.
I don't understand the details of what you are planning, if you buy the property in your name with mortgage in your name then where does your buddy fit in the picture?

If you have some sort of secret side deal then I would be concerned about that being mortgage fraud if the lender does not know about the side deal.

donall
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by donall » Tue Sep 12, 2017 9:54 pm

Invest in yourself rather than a jenky situation that requires you to co-sign. There is no upside to co-signing. You are doing incredibly well for being a full time student.

Whakamole
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Whakamole » Tue Sep 12, 2017 10:39 pm

clarkrl wrote:
Tue Sep 12, 2017 6:01 pm
He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.
I don't see why someone who claims to be making $300K/year needs a junior investor who will be cosigning the loan and adding all the risk that it entails. Something doesn't feel right.

crazygrow
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by crazygrow » Tue Sep 12, 2017 11:21 pm

Former BYU student. My aunt/uncle own a bunch of duplexes, etc. around campus. They have seen awesome amounts of appreciation, especially a few years ago when BYU made housing requirements more strict (maybe 7-8 years ago?). But they now aren't seeing any appreciation and aren't expecting anymore. They bought years ago and the market is just flat now as BYU isn't expanding and the total housing in the area is sufficient. They turned me away from investing a few years ago based on what they are seeing.

College towns are generally poor investments...

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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by junior » Wed Sep 13, 2017 8:02 am

clarkrl wrote:
Tue Sep 12, 2017 6:01 pm
He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.
If this is a good deal you should be able to do it without your friend. Maybe since he's your "buddy" he can give you free advice on how to do it on your own after you move to your new town in two years? Since you are planning to move you wouldn't even be competitors.

Maverick3320
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Maverick3320 » Wed Sep 13, 2017 8:17 am

A guy making 300k a year needs a co-signer on a 265k property?

dbr
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by dbr » Wed Sep 13, 2017 9:08 am

clarkrl wrote:
Tue Sep 12, 2017 6:01 pm
He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.
So it is not a buddy and you doing a deal but he wants to embroil a bunch of suckers to "sell under him" in some kind of scheme that may or may not make him a lot of money. I think you would be a fool to participate in this.

barnaclebob
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by barnaclebob » Wed Sep 13, 2017 9:19 am

clarkrl wrote:
Tue Sep 12, 2017 6:01 pm
He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.
Sorry but you are a pawn in this scheme.

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Pajamas
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Pajamas » Wed Sep 13, 2017 9:33 am

If your "buddy" makes $300k a year he shouldn't worry about a 20% down payment on a $265k investment property. There are reasons the lender wants 20% down for an investment property vs. 5% down for one that is owner-occupied. You are just a useful tool for him in a cockamamie get-rich-on-real-estate-using-other-people's-money scheme with a slight twist.

I wouldn't advise you to invest in real estate in your circumstances in the first place, and you wouldn't even be thinking about this "deal" if your "buddy" hadn't asked you to get involved.

Don't co-sign a loan with anyone you are not married to or related to by blood or if you are going into a real business together within all of the usual legal framework created by your own competent lawyer. Even under those circumstances, be cautious.

Just tell him you're not interested but that you are sure he won't have any trouble finding someone else to take him up on his generous offer.

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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by stoptothink » Wed Sep 13, 2017 10:13 am

crazygrow wrote:
Tue Sep 12, 2017 11:21 pm
Former BYU student. My aunt/uncle own a bunch of duplexes, etc. around campus. They have seen awesome amounts of appreciation, especially a few years ago when BYU made housing requirements more strict (maybe 7-8 years ago?). But they now aren't seeing any appreciation and aren't expecting anymore. They bought years ago and the market is just flat now as BYU isn't expanding and the total housing in the area is sufficient. They turned me away from investing a few years ago based on what they are seeing.

College towns are generally poor investments...
Former BYU professor, still live down the road. My neighborhood is littered with "summer sales" guys. I could write a dissertation about why this is a bad idea, but it isn't necessary. The fact that this guy wants to you to co-sign isn't just a red flag, it is a massive blinking marquee screaming "run". If OP's brother believes this is a good idea and have the capital, then why don't they do it themselves? Let's be honest for a second, I know hundreds of summer salesmen in this area, many of them are solid guys, but there is a valid reason they have a very bad reputation. He may be an upfront and honest guy, but there is a legit chance that he is attempting to take advantage of some young kids with dollar signs in their eyes. If you are bound and determined to leverage yourself with real estate, do it like every other non-real estate professional does in this area: buy a duplex or home with a mother-in-law apartment and live in one space and rent the other out.

As a homeowner in the area, I am still bullish on real estate here (probably for a while due to the tech boom), but you also probably missed the boat by about 2yrs if you really wanted to make money.

denovo
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by denovo » Wed Sep 13, 2017 3:38 pm

dbr wrote:
Wed Sep 13, 2017 9:08 am
clarkrl wrote:
Tue Sep 12, 2017 6:01 pm
He wants to partner with me because he wants to partner with a lot of recently married reps that sell under him and only pay 5% down for owner occupied payment. Otherwise he'd have to pay 20% down.
So it is not a buddy and you doing a deal but he wants to embroil a bunch of suckers to "sell under him" in some kind of scheme that may or may not make him a lot of money. I think you would be a fool to participate in this.

Ya, this is nuts. You have the loan under your name, hence all the risk.

mptfan
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by mptfan » Wed Sep 13, 2017 3:53 pm

Very. Bad. Idea.
I eat risk for breakfast. :)

LiterallyIronic
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by LiterallyIronic » Wed Sep 13, 2017 4:23 pm

I recently graduated from UVU. Yes, the housing market here is crazy. For now. Maybe for a long time. Who knows.

But the plan is to buy a condo and rent it out to students, yes? Now, students are poor and very price-sensitive. If you want single BYU students, they have to live in BYU-approved housing, which they can get for $250/month Sep-April easily and $100/month for May-Aug. What makes you think they'll go for yours over that? There is also a big condo complex near Walmart in Orem that is $425/month. And there are a bunch of two-bedroom apartments near 300 South in Provo that are $650/month.

I own a four-bedroom house in Provo. If I was going to rent it out, I'd probably ask $1,200. But I haven't put a lot of thought into it because I'm not renting it out. $1,400 for a four-bedroom condo seems like a lot to me. A lot of research needs to be done, more than "I think this amount is good."

Not to mention the fact, like you said, that students are highly transient. You'd be changing tenants all the time.

I'm also concerned about all the rounding. According to first numbers, which don't seem to include HOA fees that all condos have, has a profit of $524/month. You say "around $300 each" when it's only $262 each and that doesn't even consider HOA, maintenance, or vacancy.

You say you've heard quotes like "you miss 100% of the shots you don't take." To that I reply that my Roth IRA never has any maintenance or vacancy to worry about. You never have to replace the roof on your 401k.

And it's not even a buddy. And he can't do it without co-signers.

Run away.

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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by clarkrl » Wed Sep 13, 2017 7:06 pm

Thanks everyone for the feedback you've brought up a lot of things for me to think about. If anyone else wants to say anything else that would be awesome and I'd appreciate it. What I don't want to see is people telling me that the partner I'd go in on it with is trying to take advantage of me. That is 100% not the case. This is someone who has me and my wife babysit their kids, we go on double dates with them regularly (just last night the 4 of us went and did sealings in the temple), and his wife is one of my wife's best friends. He is not pressuring me at all to do this, I've been the one pestering him about doing something like this and when the opportunity came he invited me to either sit back and watch or throw some skin in the game. Regardless if I join him he's going to go through with it. And the lease isn't solely going to be in my name. Both of our names would be on the mortgage, we would qualify together, open up a joint account together to pay the mortgage and collect the rent. So any amount he gains I gain, and any amount I lose he loses. He is super low pressure and whether or not I do this we're still going to be friends. I 100% believe he has my best interests at heart. I know many of you probably do know summer sales "bro's," but I can promise you neither of us fit that mold/stereotype.

I know none of you have been supportive at all of this for one reason or another, but several of you have recommended me going out and doing it by myself, and the vibe I'm getting from others is to just completely hold off till I settle down somewhere. That is something I'd like the comments to be more focused on, whether I should be doing anything at all or not. Someone mentioned buying and living in a mother-in-law and renting out the other side. Thats what this is actually. If I were to do the exact same property just by myself would you guys recommend it? Or still advise it. And if you were to recommend it, why would you not recommend going in on it with someone? Other than them trying to screw me over? To me it seems safer, more like having a co-pilot vs. listening to someone over a headset telling me how to land a plane, then there'd be have as much risk, and being a long-distance landlord would be more feasible and if I decided to get out of it would be easier than trying to do it out of state by myself. If you don't believe that can you just pretend like he actually does have my best interests at heart and use some other argument to advise me not to do this? That argument won't really get us anywhere.

A few people have mentioned that its just a bad rental investment which is primarily why we'd be doing this. Ideally we wouldn't have students in there because they are very transient. My dad owns a few long distance rentals and has told me what a pain it is to have turnover and maintenance. We most likely wouldn't have anyone single for that reason, especially because BYU students would need to live in approved housing. Our target was mainly single families, possibly student families. My partner owns a 3 bedroom duplex thats smaller that he rents for 1300, and the 2 bedroom basement he rents out for 990. Most 1-2 bedroom married housing in Provo is 650-850 range. I am 100% open to talking about the month-to-month logistics of it.

If the home closes for 265k, and we get the 4.5% loan to reduce closing costs and have the lender be responsible for the PMI (LPI), the mortgage would be 1275.58/month. Insurance would be $50, and property tax would be $150. (He told me right now he only pays $100 a month for his duplex he lives in several houses down). Then another $50 for maintenance. There is no HOA, its a duplex not a condo. In total that'd be $1525.58. Even if we rent it out for as low as $550 and $1250, which is incredibly cheap, that's still close to $300 a month, with the potential of renting it for $750 and $1500. The biggest risk then would just be keeping it rented out. Vacancy is something that we could lose a lot on, but from my experience living here it's pretty easy to get vacancies filled. My partner has been able to fill his vacancies within 1-2 days over the course of the years he's owned his, and I've had to sell several married housing contracts. If I've ball parked the numbers it was because we're still profiting being very flexible with those numbers.

I'm not as worried about the monthly cash-flow. If you see gaping holes in my logic please bring them up. But if in total I left out even up to $200 a month, we'd still be making money no matter how small it was. Like I said that's not the part that I have doubts on, neither is partnering with my "buddy." My concerns are how messy it'd be to be a landlord out of state which I'm sure my partner would resolve, and if he doesn't then I just don't go through with it, and then mainly its the potential upside-down on the house, or maybe something like not being able to buy a home in the future if I have this one.

I've been super back and forth on doing this for the past few days. I'm probably leaning towards not doing it as of now. But most of people's concerns haven't been what my concerns have been so I'm hoping this post will get things a little more pointed at what my concerns are.

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Watty
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by Watty » Wed Sep 13, 2017 9:18 pm

clarkrl wrote:
Wed Sep 13, 2017 7:06 pm
If you see gaping holes in my logic please bring them up.
clarkrl wrote:
Wed Sep 13, 2017 7:06 pm
Both of our names would be on the mortgage, we would qualify together,
cal91 wrote:
Tue Sep 12, 2017 10:58 am
5% down payment
If you are both on the mortgage then would suspect that you would have to get an investors mortgage with a larger down payment.

barnaclebob
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by barnaclebob » Thu Sep 14, 2017 10:51 am

If its a good deal and hes going to do it anyway, why not form a proper legal entity to do this if you want in? He may have the best of intentions now but people change when things go south. FYI financial advisors are frequently very good friends with their clients.

maroon
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by maroon » Thu Sep 14, 2017 11:40 am

Look, you really haven't identified the worst case scenario.

I know two people who rented out their houses only to have the tenants totally destroy them. Dogs peeing and pooping in the house, holes in the walls, kitchen cabinets torn out, etc. In both cases, damages were severe that the owners let the houses go into foreclosure. Seriously you don't know what the worst case can be.

I also think this seems to be a sketchy investment relationship, but whatever. You say it's not.

UKFred
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by UKFred » Thu Sep 14, 2017 12:01 pm

I may be mistaken, but from the description, it sounds a bit like mortgage fraud. Now that's a strong accusation, so let me explain my assumptions: The 5% down payment (deposit in UK terms) is for owner-occupiers, which is why your friend is looking for married co-workers to co-sign. Once you buy it, what you guys will be doing is renting it out, which would have actually needed a 25% down payment. The interest rate (at least in the UK) is also typically lower for owner-occupiers than for buy-to-lets.

Basically, the risk profile of an owner-occupied property is quite different to the bank than an investment property. So, it's fraud against the bank, not against each other. I could be wrong, but that's what it sounds like to me.

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greg24
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by greg24 » Thu Sep 14, 2017 12:29 pm

You came here asking what people thought. The feedback is nearly 100% against it.

You can do with that whatever you wish.

PVW
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by PVW » Thu Sep 14, 2017 12:30 pm

Reasons that I think this is a bad idea:

- Going into business with a friend. Disagreements might force you cancel either the friendship or business relationship. Good friends think this will never happen, but it does.
- You seem to know nothing about real estate investing. You have painted a rosy picture of the possibilities, but have not grasped the full picture. You should educate yourself on the business of being a landlord.
- Your friend is looking for other similar partnership opportunities. More than one or 2 of these types of partnerships and it would be difficult to manage the business relationships and landlord duties. Once you leave town, you are almost 100% reliant on his management. How experienced is he with real estate management?
- You are investing in something worth twice your yearly income. Do you have an emergency fund? Can you withstand a significant financial problem with your real estate? How certain are you that you can maintain the normal financial requirements after graduation? Can you stay solvent if this investment implodes?

Having said that, friends go into business together all the time and in many cases it works out well. If you want to do this, then get serious and do it right. Educate yourself on being a landlord. Form a business to define each of your interests, hold your assets, and distribute income.

PVW
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by PVW » Thu Sep 14, 2017 12:38 pm

UKFred wrote:
Thu Sep 14, 2017 12:01 pm
I may be mistaken, but from the description, it sounds a bit like mortgage fraud. Now that's a strong accusation, so let me explain my assumptions: The 5% down payment (deposit in UK terms) is for owner-occupiers, which is why your friend is looking for married co-workers to co-sign. Once you buy it, what you guys will be doing is renting it out, which would have actually needed a 25% down payment. The interest rate (at least in the UK) is also typically lower for owner-occupiers than for buy-to-lets.

Basically, the risk profile of an owner-occupied property is quite different to the bank than an investment property. So, it's fraud against the bank, not against each other. I could be wrong, but that's what it sounds like to me.
The OP has the intent to occupy the residence. I'm not a lawyer, but that might be enough to satisfy the mortgage agreement. In the case of "fraud" and the mortgagee doesn't fulfill the mortgage agreement, my guess is that the mortgage holder would call in the note and you could refinance as an investment property loan.

Also not legal advice, but I definitely wouldn't lie to the homeowner's insurance company about whether the residence is owner occupied.

alex_686
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by alex_686 » Thu Sep 14, 2017 1:04 pm

Let me chip in and say that this partnership sounds a bit weird. Which is o.k., I kind of get it. But you are mixing up friendship and a professional relationship into what sounds like armature hour. Which, once again, is kind of o.k. You are young, this could be a learning experience, if this projects causes you to declare bankruptcy - the worse case scenario - you are young enough to start over. But I think there are 2 strikes against this.

The first is the unequal relationship between you your partner / boss. He has lots of small deals going with other people. If they go bust what happens? Either he has a way to insulate himself or he does not. If he does then his natural inclination will be to take on lots of high risk high return projects. So what if a few go bust, overall he will make money. It is a "heads I win, tails you lose" situation. So misaligned interests. Or he does not have a way to insulate himself, in which case one of the deals go down and you have creditors knocking on your door to seize your property to pay off his debt. Not deadly but it does mean a messy legal situation.

The second is that you are his junior partner and he is using you for cheap equity. Which is o.k. If he is experienced that might be the cost with working with somebody, leading to pick their brain, and developing your own skills. Expect you won't be there. As you said:
clarkrl wrote:
Wed Sep 13, 2017 7:06 pm
My dad owns a few long distance rentals and has told me what a pain it is to have turnover and maintenance.
I would strongly second this.

Every time I look at the relationship it just seems off. It does not fit into any standard sized relationships that I know of that are typically to these sorts of deal. And I am over here so I can't really judge. Just make sure that if you do this you get the business side of things nailed down firm. Nothing informal, get the big points down in writing. And don't be a rules lawyer - business relationships are flexible. But it does give an idea on who is reasonable for what - a solid base of understanding to build off of.

I have not picked over the numbers to figure out if the deal is strong or not - I don't know the market so I am not going to put in the effort.

TropikThunder
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Re: Brother in College Co-Signing w/ Buddy for Duplex

Post by TropikThunder » Thu Sep 14, 2017 7:54 pm

PVW wrote:
Thu Sep 14, 2017 12:38 pm
UKFred wrote:
Thu Sep 14, 2017 12:01 pm
I may be mistaken, but from the description, it sounds a bit like mortgage fraud. Now that's a strong accusation, so let me explain my assumptions: The 5% down payment (deposit in UK terms) is for owner-occupiers, which is why your friend is looking for married co-workers to co-sign. Once you buy it, what you guys will be doing is renting it out, which would have actually needed a 25% down payment. The interest rate (at least in the UK) is also typically lower for owner-occupiers than for buy-to-lets.

Basically, the risk profile of an owner-occupied property is quite different to the bank than an investment property. So, it's fraud against the bank, not against each other. I could be wrong, but that's what it sounds like to me.
The OP has the intent to occupy the residence. I'm not a lawyer, but that might be enough to satisfy the mortgage agreement. In the case of "fraud" and the mortgagee doesn't fulfill the mortgage agreement, my guess is that the mortgage holder would call in the note and you could refinance as an investment property loan.

Also not legal advice, but I definitely wouldn't lie to the homeowner's insurance company about whether the residence is owner occupied.
The standard loan application and documents require all borrowers to attest to occupying the residence for at least the first year, not just one or some of them (Fannie Mae has special underwriting rules for non-occupier borrowers too). The partner cannot honestly attest to that for multiple properties. And worst-case, if the original lender calls the note, will they provide enough time to refinance?

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