With the market progressing the way it is, the ability for first time home buyers to get into get into the market is quickly evaporating. In the past year alone, any down payment that they may have saved up will be woefully insufficient or will force them to dramatically reduce their purchasing budget. Even those who are in the market – for example a couple that won a condo but need to move due to a growing family are having difficulty making the leap even with the increase in their current home.
A recent article by Inman news focused on the idea of giving your children their inheritance early (assuming of course it was there to give) and giving them the benefit of life lessons and home ownership.
We argue that this is no longer a sentimental life lesson but perhaps the only hope for an entire generation to realize home ownership. It also happens to be a great potential investment strategy.
Here are a few options to consider:
In all of these scenarios we recommend that your children have some skin in the game…ensure they have been working to save up a part of that down payment so they get used to covering certain costs on a monthly basis, particularly if they have been living at home rent free!
Loan your kids the down payment
- Loan you children part or all of the down payment (and have them cover closing costs and the land transfer costs with what they have saved).
- Establish an interest free or interest based loan with specific terms for repayment of amount and time.
- Establish consequences for non-payment in the agreement (such as penalties at time of sale).
Loan your kids the down payment with balloon interest payment
- Loan your children the downpayment but rather than have them pay you monthly (in the case where they could only afford to cover the mortgage, property taxes and their personal expenses) have them pay the accumulated interest upon the sale of the home or after a period of time when they will be in a better position to pay.
Invest the amount of the downpayment for the purchase of the home.
- Provide the down payment for the home but rather than collecting interest payment, hold an interest in the home equivalent to the value of the downpayment in relation to the value of the home and get your return when the home sells.
- i.e. $100,000 down payment on a home purchased for $600,000 = 16.7% interest in the home. Home sells in the future for $800,000 and funds owed back to parents is $133,600.
- An option within this option is to lend those funds to your children with the expected outcome at sale of a relative value or set up a corporation or joint venture partnership to make it official.
In any scenario be sure to consult with your accountant and lawyer to understand any tax or legal implications.
Without using one of theses strategies, this may be your future!!!
Have more questions about how to invest with your children? Call us or email today at 416.699.0303 or email@example.com!