It’s getting harder and harder for young people to buy their first homes – to the point where we often recommend young people buy an investment as their first purchase. Even an investment can be a stretch, though – especially with capital city property prices going through the roof.
For parents who want to help their grown kids get into the property market, there are several options. Each one needs to be considered carefully – none of these are without risk. We recommend you talk to us before you make any decisions. Here are some ways to approach this:
• Buy the investment, and set aside the income (and, potentially the equity gains) for your son and/or daughter. You may need to negotiate who will take on the holding and maintenance costs and responsibilities.
• Provide the deposit. If you have significant cash reserves, you may want to offer the whole cash deposit to your child. They will need to provide their lender with evidence that they can service the rest of the loan.
• Guarantee the loan. Your child may provide some or all of the deposit, and you could provide the lender with a guarantee over the rest of the loan.
• Become a business partner with your son/daughter. The options here are many: you could split the deposit, split renovation costs, split the balance of the loan, split responsibilities for the property. This could provide you with some income while building equity for your offspring.
Whichever of these you choose, you need to consider the long-term consequences carefully. What, for example, would happen to your relationship if your daughter defaults on her loan? What would happen to your retirement plans if your son can’t afford to repay the deposit money you lend him? Are you happy with an informal arrangement, or would you rather have a lawyer draw up an official contract? If so, will you include penalties for non-performance?
Here are our suggestions:
• Discuss the whole process and the life of the investment with your child. Make sure you both agree on every major point – you don’t want any surprises down the track. Make sure both sides have a similar approach to risk, for example. Do you agree on maintenance spending? On potential tenants? On property management?
• Discuss what you want your child to gain from the experience, and what you want to gain. Be very clear.
• Have a plan for if things go wrong. When do you expect to be informed?
• Have an exit plan. Do you expect to be paid back? When? What happens if you’re not? Are you expecting interest? Can you withdraw your investment early? Under what conditions?
• Keep the lines of communication open.
If you are happy to risk all eventualities, helping your adult children begin property investing can give them an invaluable financial head-start – especially if everyone goes into the process with their eyes wide open.