Real Estate Rental Property #4 Update (October 23, 2013)

by FI Fighter on October 23, 2013

in Real Estate Updates

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Appeal… DENIED! I guess it was a long shot, but I was still hoping to pull this off. Oh well. Now it’s on to Plan B — finding a co-signer.

Now, who in their right mind would want to help someone co-sign? By co-signing, that person assumes all the risks (in the event of missed payments, the lender typically goes after the co-sign first since they have less debt!), and in return, gets none of the benefits. Granted, this is only temporary, but I’m guessing you won’t find too many willing volunteers.

In most situations, I would agree that co-signing is risky. For most borrowers, they borrow because they want to purchase that first home (owner occupied). They need help because either their credit score is too low, or their debt-to-income is too high. There’s a risk they won’t be able to make the monthly payments.

I would argue my situation is a whole lot less risky… and different. Unlike the above scenario, I’m not a risk! I’m not a first time homebuyer who’s purchasing more home than I can chew. This is an investment property and I’m only investing in it because it will make me money! Shoot, I won’t even be the one making the monthly payments — my tenants will.

Yes, my debt-to-income is too high (technically), but that’s only because of a (dumb) guideline in place that won’t count any of my rental income because the properties haven’t shown up in my tax returns over a 2 year period. Truth is, if my rentals weren’t so cash flow positive, I wouldn’t even be able to put myself in this situation to accumulate my third rental this year… and by the way, I have more than enough funds in reserve (emergency fund) to weather any potential storms. But in this situation, this “positive” ends up hurting me.

To close this deal, I only need the co-sign to be on record for 6 months. At that time, I will refinance to get their name removed. To eliminate all risk, I’m thinking of proposing the idea that I will make 6 month’s of mortgage payments in advance. The monthly mortgage payment should only be $336.46 (excluding escrow funds), so entirely doable. To put this number in perspective, one of my Silicon Valley properties has monthly HOA dues that are $306/month. Clearly, this isn’t an enormous loan I’m tacking on. 😉

As an incentive, I’m thinking about offering the co-sign a $1000 bonus for assuming “no risk”. Hopefully I’ll be able to convince someone to take the bait.

So, there’s my latest update for today. Not sure if it comes across this way, but I’m pretty irritated right now. 😉 This entry was more of a rant than anything. Please forgive me and have a nice day!

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{ 10 comments… read them below or add one }

1 MarioNo Gravatar October 23, 2013 at 4:08 pm

Hi there I think you are not ready to buy property number 3 the bank isn’t stupid yes there is risk you should relax and save more money first everything happens for a reason.

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2 FI FighterNo Gravatar October 23, 2013 at 6:54 pm

Mario,

Perhaps it’s a sign I’m moving too fast. However, I kind of need to since my timeframe is so short.

I’ll try and relax some more and take a chill pill. 😉

Best wishes!

Reply

3 All About InterestNo Gravatar October 24, 2013 at 7:06 am

Hi FI FIghter,

I was wondering how you were going to buy up these properties so quickly unless you have a super high income currently. I had issues when I first was in the market to buy my current house because I had two recent rentals. The underwriters averaged two years of income from them but I was living in the condo and hadn’t rented it yet so it killed my debt/income ratios. I’m in better shape now because I have two years under my belt so I may be looking for rental #3 around the end of the year. Good luck and I look forward to the updates.

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4 FI FighterNo Gravatar October 25, 2013 at 7:56 am

AAI,

Yeah, this is something I totally overlooked, but should have known would become an issue sooner or later…

For Rental #3, they never mentioned anything about debt/income, so I assumed they counted my rental income from the other units. With this new lender, they are telling me explicitly that I’m over-leveraged.

Good luck on finding #3! You are located in a very good area for rentals.

Cheers!

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5 writing2realityNo Gravatar October 24, 2013 at 7:09 am

FI, I wouldn’t worry about taking that chill pill. At your age, plow in and get elbow deep in there. I am hoping you can find someone who is amenable to your cosigning plan, as it is clear that you are well-funded enough, and are generating enough cash flow from your other rentals to support all of your properties over the short-term.

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6 FI FighterNo Gravatar October 25, 2013 at 8:02 am

writing2reality,

Thanks for the support. Yeah, I do have a few reasons why I’m being so aggressive in acquiring more rentals. Mostly b/c:

1. Want to retire early
2. Interest Rates are still really low (historically)
3. Not sure how much longer I can keep grinding away in high-tech… but I need a high W-2 income to get loans… sort of handcuffed by this atm

So, yeah, I’m jumping in the deep end, so to speak, with not much experience and know how… but I’m confident I’m buying right…

I would like to get to 10, or close to 10… then I will really take a step back to CHILL!

Best wishes!

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7 Pauline @RFIndependenceNo Gravatar October 24, 2013 at 3:07 pm

I have used my mum and a long time friend a few times to borrow money. I was 200% sure I would be able to repay and they were happy with the interest, higher than their savings account. My mum always asks if I need more 🙂

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8 FI FighterNo Gravatar October 25, 2013 at 8:05 am

Pauline,

haha, your comment cracks me up! That’s so cool that you’ve already gone through so many of the things I’m trying to accomplish now. It’s like we have the same mentality when it comes to real estate investing.

Yes, now that I’m aware of this problem, I’m going to tap into as many family members, friends, etc. as I can. I’m hoping the $1000 bonus will be a good start to get them interested… If I can prove to them that it’s low risk, maybe they’ll be interested in more deals 🙂

Take care!

p.s. your mom is great. She’s helping you out… and herself!

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9 MartinNo Gravatar October 25, 2013 at 10:59 pm

Fighter, send me an email with details. I might consider it.
M

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10 FI FighterNo Gravatar October 31, 2013 at 10:31 pm

Martin,

Thanks for the offer, but I think I found someone local willing to co-sign. Hoping it works out now!

Cheers!

Reply

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