Approaches range from offering a straightforward monetary gift to making the purchase yourself and becoming a landlord. Explore various strategies and their tradeoffs.
Real estate has long been one of the foundational pieces for an investment portfolio. But for younger generations, buying a home has become increasingly difficult. Younger homebuyers face all the same factors of a challenging purchase environment but may not have the ability to come up with a down payment or the earning power to qualify for a mortgage.
That’s where parents and grandparents can sometimes step in – with caution.
Before you agree to aid a loved one to purchase a home, consider how your decision will affect your own long-term financial plan. Make sure that whatever support you offer won’t interrupt your own goals for the near or distant future, especially your path toward an ideal retirement. You may need to have difficult or emotional conversations prepurchase about why they need your help, what expectations both parties have, and how long-term costs like maintenance, repairs and utilities will be paid.
Choose a strategy
There are myriad ways you can help the next generation in homebuying, and each comes with its own set of parameters. Here are a few to consider, from gifting to lending. With established credit, you may be able to get a better lending rate than a first-time borrower. Your advisor can help you weigh your options.
Offer a monetary gift
Provide a loan or private mortgage
Loan backed by eligible securities
Become the landlord
Be a co-borrower
For many parents and grandparents, the price of rent for an apartment or house nearby campus is as expensive as a mortgage would be. For that reason, some choose to buy a house or apartment that their children or grandchildren can live in while they go to school. This could be especially advantageous if siblings will attend the same or nearby schools at the same time.
This arrangement can work many different ways. Some have their children or grandchildren pay them rent, which they apply to the mortgage, and then transfer ownership of the property at graduation. Some hold on to the property and continue to rent it to students after their children or grandchildren have graduated and incorporate the rental property into their total portfolio. Be sure to factor in normal, ongoing repair and maintenance costs and insurance as you do your feasibility calculations. There are also the costs and time associated with finding good tenants – including background checks and screenings. If you want to be more hands off or are a long distance from the home, a property manager can be a good way to go. But, keep in mind, they will take a percentage of profits, and you will still be on the hook for any direct repairs that need to be made.
It’s an approach that requires lots of consideration, clear arrangements with your family tenants and a long-term strategy before starting to shop the market. Talk through your strategy with your advisor and accountant to determine what financing vehicles are available and what potential tax advantages would accompany this approach.
Whatever route you choose, look at your long-term plans and goals, do research on the real estate market where you plan to buy, talk to potential lenders and discuss with trusted advisors to make a plan.
Sources: usbank.com; forbes.com; consumerfinance.com; freddiemac.com; themortgagereports.com; wikipedia.org; seekingalpha.com; freddiemac.com; nar.realtor; forbes.com; cnbc.com.
Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
Raymond James Financial Services, Inc., Raymond James & Associates, Inc., and your Raymond James financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.
Raymond James Financial Services, Inc., and Raymond James & Associates, Inc., do not provide advice on mortgages.
Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.