As a parent, you want to be able to provide your child with every opportunity possible. From advanced learning to enriching activities and organized sport, it’s only natural to want your son or daughter to have life experiences and opportunities that will help them prosper later in life.
But when does this urge to provide and nurture take a turn towards enablement and entitlement? Should you continue to provide financial assistance even after your son or daughter has crossed the threshold into adulthood?
Should you, for example, help your child purchase their first home?
When mom and dad become landlord
Parents concerned about rising house prices are increasingly opting to purchase properties on behalf of their children - some while they’re still enrolled in preschool. According to The New Zealand Harold, children as young asfour years oldare having houses purchased on their behalf by parents who plan to manage the properties as rentals until the child is legally old enough to take possession. Across the pond in New York, parents (obviously, rich ones) are purchasing their adult children Manhattan studio apartments as graduation gifts, hoping to take advantage of low mortgage rates and reasonable list prices.
In both cases, brokers are working with parents that view these apartments as potential investments for themselves. While some purchase these homes as straight-out gifts, others retain ownership, while still others acquire them through a family trust or joint arrangement.
Giving them a step up the property ladder
On the one hand, you have a growing number of adult children living at home, struggling to find work and chipping away at seemingly insurmountable debt. On the other, there’s the option of helping your son or daughter get a step up the property ladder by providing them with a firm financial foot in the door. Yet herein lies the problem: In giving them the keys to homeownership you are also taking away something just as important…the joy of making it on their own. Toss in the potential for disastrous family dynamics and it’s easy to see how this form of help could ultimately end up hurting everyone involved.
If you’re considering extending an olive branch of home-buying assistance to your adult child, you might want to hang back and think about whether your decision will ultimately help or hinder the situation. Before you make that down payment, consider the following…
Things to consider before buying property for a loved one
Is it a poor investment?
When you mix money with family there’s always the potential for disastrous emotional consequences. Establishing the “Bank of Dad” or “Money from Mom” can create a dangerous sense of entitlement and expectation. Owning a home is a huge responsibility, emotionally and financially. Is your son or daughter mature enough to handle this commitment? Will they be able to handle the upkeep and paperwork that comes with managing a property? Rushing your child into a home purchase could put undue stress on your relationship with your child. As much as you’d like to provide them with a solid investment, sometimes the best advice is to keep renting.
What about the siblings and significant others?
Take some time to think about family dynamics before offering to front your child thousands ofdollars. Are there siblings to consider? Is there an expectation that you will provide the same kind of assistance to other family members? Is this something you’re financially prepared to do?
Parents also need to consider property law when it comes to providing financial aid to a child who is married or cohabitating with a partner. If there is a break-up, you want to make sure that your investment is protected. One of the easiest ways to do this is to provide your child with a structured loan rather than a financial gift. While each situation dictates what will make sense (and you should always seek legal and financial advice), parents should always put these sorts of financial agreements in writing. While this will add to the cost of the purchase through the drafting of sound legal documents, you will be in a better position knowing that all parties are covered in the case of a disagreement. Typically, if a break-up were to occur, and a settlement were required, the loan would be subtracted from the family property before being divided up.
When buying a property for a child, parents need to be aware of any tax consequences. When a property stays in a parent’s name, for example, banks will often view it as a second residence or investment property (and it will be taxed accordingly upon a sale). Furthermore, both classifications will typically warrant a higher mortgage rate and require a larger down payment.
On the flipside, if you choose to make the gift official and put the property in the child’s name, you could potentially be in for a nice tax windfall. Tax exclusions on gifts and estates can be quite favorable to the giver, provided you have the cash to make the purchase upfront.
So, what is the right decision?
As a parent, it’s normal to want to help. And if you can, you may consider it. Just make sure that it’s the right financial and emotional decision for both you and your child.
At the end of the day, you want to set your children up for a life in which they will master money, rather than be mastered by it. So don’t be afraid to offer help… but do it in a way that continues to teach important values and strong financial lessons.