News: Vancouver Real Estate Market

How can parents help their kids financially with their first homes?

 

These days it seems quite common for parents to help their children buy real estate. When I look back over the last 3 years, I would say about a third of all the properties I've sold had the buyer's parents helping in some form or another. I am a prime example myself. My parents helped me with the down-payment of my very first home and I wouldn't be where I am today without their help. Thanks mum and dad :)

 

As a parent how can you help?

 

The easiest way for most parents to help financially is be a cosigner on your child's mortgage. Typically children don't have a long enough credit history to secure a large mortgage on their own.

 

The second most common way parents help is by way of a direct cash donation or gift towards the down payment. 20% of the purchase price or more is ideal to help avoid mortgage insurance. This saves your child from paying thousands in insurance premiums.

 

Helping your kids bridge the gap of affordability from a home without income potential to a home with income potential will pay dividends over the long term. For example homes with income potential (such as a secondary basement suite) help to offset the cost of financing. Homes with suites are typically valued a little higher than those without a suite. Remember secondary suites are not all considered equal. Depending on the area you are looking there are big differences between authorized, unauthorized, registered, legal and illegal suites, so be sure you know the implications of what you are buying.

 

Alternatively if the home doesn't currently have a suite, the property may have suite potential. In one of my earlier properties I converted my basement into a 2 bedroom legal authorized suite for $40,000. The monthly income was around $850. Where could you buy an investment property for $40,000 that would give you a return of $850 per month? Certainly not in this "neck of the woods". The extra after tax income allowed me to pay down my mortgage quicker with larger principle payments.

 

If you can't afford to gift a large amount toward the down payment and your child is buying with 5 or 10 % down (also referred to as high ratio) there are innovative programs currently available such as the "Purchase Plus Improvements" program that would allow you to help financially for a short period of time, say 90 days. The program is perfect for homes that need a little TLC or where there is secondary suite potential. In a nut shell, you help to finance the renovations upfront and when complete, you get paid back what you've spent.

 

I've also seen parents buy the home out right for their children, who then pay their parents back like a mortgage but without the interest. Lucky kids!

 

For new parents why wait 25 years to help out? I don't know anyone who would regret buying any piece of real estate 25 years ago, even 10 years ago. One can only imagine what values are going to do over the next 25 years. Why not buy a cash flowing investment property today which could later be gifted in whole or in part to your child when they graduate? In 25 years time you will look like a rock star when you tell them how much you paid for it. If you have built up equity in your current home this is easier to do than many may think.

 

And lastly the value of a good education is key. Teach your kids how to manage their money, the value of good credit and the value of owning real estate over the long term.

 

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