Is your nest a little less empty than you thought it would be by now? Or maybe your young ones are struggling to stay aloft in a tumultuous economic environment, burdened by student debt and other obstacles.
You’re not alone. Almost one-third of adults between 18 and 34 in the U.S. are living at home with their parents, the highest rate since 1880!
Fortunately, there’s one way you can get that nest to yourself: buy your child a house.
Whether your kids are still at home or they’re struggling to move beyond renting, buying a home for your child can actually be a way to help them find independance while building your investments. While many parents opt for the traditional gifting of a down payment when buying a home for their child, there are a couple approaches you could take, and benefits to each.
How To Do It
Gifting the Down Payment
Your first option when it comes to buying a home for your child is gifting them the down payment and letting them handle it from there. This is exactly what it sounds like: you give them the money to cover their down payment, with no expectation that it will be returned.
The benefit of this is that it doesn’t put your child further in debt, which could hurt their chance at obtaining a mortgage in the first place.
Another benefit is that a person can gift $14,000 a year to their child without it being subject to taxes. In fact, the rule is technically $14,000 from each parent to each child or in-law, so if you have a spouse, you could gift one child $28,000 total, or gift your child and their spouse $56,000.
This option, while potentially relieving your children’s needs and giving you peace of mind, won’t result in any sort of economic payoff for you, though.
Lending Your Child Money
Rather than gifting your child money to buy a home, you could consider lending them the money. This lets you set affordable interest rates, and offer more flexibility and less risk than with a traditional lender.
Something to keep in mind about lending is that any interest you earn on the loan is considered as income by the IRS. And, if you choose not to charge interest, the IRS can still tax you on imputed—or assumed—interest.
In a lending scenario, you benefit from the moderate amount of interest generated by your loan, and of course, the satisfaction of helping your child afford a home in the first place.
Co-signing the Mortgage
If you don’t want to give or lend your child money, you can always support their purchase by co-signing their mortgage.
If you’re certain your child is in a good place to be buying a home, this could be a wise financial decision for you. Depending on your situation, you can cosign on the condition that a certain percentage of the house’s equity is yours. In this way, you both profit financially in the long term.
However, by co-signing you open yourself up to scrutiny by the lender. Additionally, you’re responsible if your child defaults on the loan for whatever reason, and the mortgage is counted as one of your debts, which could impact other plans you have down the road.
Buying a House Outright
Rather than helping your child buy a home, you could always buy a house outright yourself. This certainly helps keep things clear — you buy the house and then you reap the rewards if and when it is sold.
Within this scenario, you have two options; letting your child live in the home for free, or charging them rent while they live there.
In either case, chances are your child’s cost of living will be lower than if they were still renting, and this can help them stay afloat financially and save up for their own purchase. You could even consider selling the house to them once they’ve saved up enough in this scenario.
When To Do It
The Right Place
There are two “right places” to buy a house for your child: in a city where there’s a positive real estate market forecast, and in a location your child intends to stay for at least three to five years.
In terms of strong, stable regions to invest in, Phoenix is a good place to start. The real estate market in Phoenix is looking bright in 2017 through to 2018. The market is full of both single-family homes as well as increasingly popular townhouse and condo options. Housing prices are continuing to slowly rise, which is actually a good thing because slow growth can prevent the market from “overheating.”
On the second point, you’ll want to ensure your child intends to stay in the house you buy in for at least three to five years because that’s how long it typically takes to break even. While you may turn a profit in less time than that, it’s unlikely, because upfront costs like the broker’s fee, closing costs, mortgage insurance, and improvements often take time to make up in equity and appreciation.
The Right Time
As with location, timing is important when looking at buying a house for your child. While the Phoenix market is looking up for the year ahead, the sooner you get in on it, the better. Interest rates are rising in Arizona and across the country.
And while you may be ready to take on a second property or loan your child money to buy a home, they might not be. A child in their 20s may have some rocky years ahead, with major life changes including career shifts, moves, marriage, children, and more. Buying a house should wait until you’re reasonably sure they’ll be staying where they are and making a steady income.
Mitigating Risks
Financing
Whether you buy your child a house, loan them money, or co-sign their mortgage with them, make sure you can afford it first.
A second home is more than just a second mortgage; it’s more taxes, interest, and maintenance costs. Make sure you have enough set aside in savings to cover these potential costs without dipping into your retirement savings. Don’t do things like taking out a loan on your own mortgage to finance your child’s. Ensure your own financial stability first. You won’t be teaching your kids any good financial lessons by going broke yourself.
Emotional Risks
When you combine financial matters with family matters, complications can arise. It’s important to set out clear parameters and expectations with your child before you buy them a home or contribute to one.
If you gift a down payment, don’t expect anything in return; if you loan the money, make sure there is a clear repayment schedule and agreement; and if you co-sign with your child, make sure you’re comfortable with the risk of them defaulting.
Complications can arise regardless of which option you choose. By pre-empting these with clear communication, agreements, and making sure you’re financially stable before helping our your child, you can mitigate those risks.
At the end of the day, real estate is a smart investment in today’s market, and buying a home for your child could be a wise financial decision that pays off for both of you in the long run.
