Helping Children Buy a Home: Look before you leap!
Successful families often find themselves in a position where they are willing and able to assist their children or grandchildren with buying a home. After completing post-childhood support goals of funding an education, wedding, or travel expense, being able to help a child purchase their first home is frequently a goal of our clients. For many families, it brings a sense of satisfaction in setting up their children up to achieve their own life goals. However, when done without the proper planning, it has the potential to create family and financial tension.
In this blog we want to discuss some of our guidelines and considerations that we believe families should work through before doing so.
Is this something that will Benefit Your Child(ren)?
Before you decide to help your child buy a home, here are some questions to consider.
#1
A great place to start this journey is by asking yourself if this is something that will truly benefit your child. For many, the reactive answer is “yes, of course!” Digging deeper, there are some pitfalls you will want to avoid at all costs.
#2
In assisting them with this purchase, are you unintentionally creating dependency? In other words, will this purchase create a situation in which the child feels that they will continue to receive support from you throughout their life?
#3
Are you inadvertently “helping them” into a commitment that might not be right for them? From a child’s perspective, a gift tied to a home purchase might seem too good of an opportunity to pass up. However, they may not be considering if they will still be able to receive support later. They may feel they need to accept / act on the gift now while it is available to them. Instead of pursuing their dream of relocating to a new city or following a challenging career path, are you enabling them to lock themselves into a location or job that they cannot get out of professionally or financially?
#4
Can they reasonably afford the mortgage and upkeep of a property? Sometimes we see that parents are willing to give a certain dollar amount that allows the child to purchase a larger home than they would have normally been able to afford on their own. In the long term, it becomes a burden.
#5
Are my other children going to expect us to do the same for them? This is a very real family dynamic problem that should be thought of ahead of time. Let’s suppose there is a family with two kids. They paid for one of their children’s college’s and the other received a full-ride. Although they equivalently helped them with those education goals, the child who received a full-ride or attended a lower price school might not feel that way. Determine whether you will support children equally through their goals.
How much Can You Afford to Give?
When working with a financial professional, the next step could possibly be the easiest. You need to ask yourself(ves) the question, “How much can we afford to help within the context of our own financial goals.”
Being able to gift funds as an accelerated inheritance is a very different situation than using funds that you might need later to reach your own goals. We highly encourage families to work with a financial advisor to create projections of their own financial goals first, and then see if this additional goal of helping a child buy a home fits within their larger plan.
Planning the gift amount and how you support
How you help a child with a home purchase depends on how the funds will be used. If money is needed for a down payment, a lump sum will generally be needed. This could come in the form of cash, stock, personal “loan” or even borrowing against an investment account if rates are preferrable.
If you think this will be a fixer-upper or a property that will require renovations, maybe a better gift is to set aside a remodel fund where the child can use the funds as they see fit to improve the property or purchase furniture.
If this is a multi-family property and there will be a renter, it could simply be offering to backstop them as cashflow support if they can’t find a renter to help with the mortgage payment.
Maybe the support manifests itself by helping them with a series of home repairs yourself if you have the skills to remodel a bathroom.
The takeaway here is have a plan.
Having “the conversation”
Now that you have the plan in place that you want to help and know how much you can give, the next step is sitting down with the child (or child and their spouse) and asking, “Do you want help with this purchase?” This might be the most overlooked and delicate aspect of this type of gift planning situation.
From the giver’s perspective, you’ve already done the legwork and you may be thinking “we are going to give them $X amount that we can afford, and it is going to be great for them and great for us”. From the recipient’s perspective, they might be thinking you are being very generous and be very grateful for the assistance.
Or they might be thinking one of the following:
I’m not ready to buy a house. Why am I being pressured into it?
This really isn’t my goal. I really want to do X,Y,Z.
Am I going to feel indebted to them for this?
Is it going to take away my independence?
Will this create stress between my spouse and I because you can help but their parents’ cannot? Will that other person feel okay with this decision?
Is this really a gift or is this just a loan that I’m expected to repay?
I really wanted to be able to do this myself one day.
Having this type of open and candid conversation will go a long way towards a successful gift. Both sides will learn a lot about each other’s intentions, and it is likely most of it will not be related to the real estate being discussed.
Will You take Legal Ownership?
One strategy we have seen implemented by parents is to legally take a joint ownership stake in their child’s house. When this is the case, there are many additional considerations.
What are the property’s rules for transfers on death?
Should the deed be held as joint owners, Tenants in Common, etc.?
Is owning this property going to cause you to file additional state tax returns?
Do you need additional liability insurance in case one of your child’s guests injures themselves on the property?
The legal aspects do come into play when you are assisting your children with buying a home, and they should be thought out properly.
Conclusion
Helping a child or grandchild with their first home purchase can be a hugely rewarding experience for all involved when done properly. It is a great way to assist with the acceleration of life goals and to help build generational wealth. Developing a complete plan and having in-depth conversations around the topic will ensure that all parties feel that same amount of satisfaction.
CONTRIBUTOR
Andrew Hoffarth, CFP® is a Lead Advisor with Financial Alternatives. When he’s not enjoying outdoor activities with his family, he excels at finding solutions for complex financial situations, allowing successful families to focus on what is most important to them. Schedule a time to chat with Andrew.