How to Help Children Get Into a Home

[Sojourner]

Quote:

Originally Posted by HadEnuff While it's nice to help your kids get into a home you should consider a few things. Why haven't they been able to save up enough for themselves to get a home yet, without your help? One valuable lesson learned in accumulating the 20% down, and the other incidentals, is that it demonstrates that they have enough income, AND can live below their means enough to accumulate the cash. When we help our kids into a home, we are also helping them into a neighborhood. What will the temptations to spend be like when they meet their neighbors who have been able to save that money, and belong to the local country club, or their kids go to the expensive summer camp, or drive nice cars, have nice furniture etc. etc. If they haven't been able to save the 20% plus other costs, how will they handle unforeseen expenses, such as broken HVAC, plumbing issues, etc. etc. that come with home ownership?

+1000

"Helping" a child purchase a home that they probably couldn't otherwise afford is setting them up for economic dependence. The Millionaire Next Door devotes an entire chapter to this phenomenon, which the authors term economic outpatient care (EOC). They claim that their research shows that adult children who receive large doses of EOC (like cash gifts or other financial "help") frequently end up living above their means, saving and investing less, and building less wealth in the long run. This is clearly not what most parents offering such "help" want for their adult kids, but it seems to fall squarely under the law of unintended consequences.

[Golden sunsets]

I think it really depends on how secure your own finances are. If they are Rock Solid, then I see no reason to hold back. I don't know though, if I would take the funds from a 401K incurring additional taxes.

We gifted a sum that equaled 12.5% of our DS and DIL's down-payment 3 years ago on a Condo in a HCOL East Coast city. The total DP equaled 26.5% of the Purchase price. Over the last 3 years, they have aggressively paid additional principal above and beyond P&I and have just put the condo on the market.

They are looking to purchase an SFD in the suburbs and hopefully the equity in their current home will be sufficient to serve as the DP on a much higher priced home. So we haven't enabled them, or stunted their independence.

[Cobra9777]

I agree with kannon and RunningBum... once it's abundantly obvious that there will be a legacy, there's a balance between: (a) wanting to help at a time when kids need it the most, and when you are actually alive to be a part of the giving process; and (b) creating a sense of entitlement or expectations that changes their behavior with respect to their own money.

That is a careful balance that parents have to make based on what they observe about their kid's behavior and tendencies with money.

However, I think it's flat wrong to make the blanket assumption that a one-time gift to help with the down payment on a house (to avoid PMI, for instance) is "setting them up for economic dependence."

Anyway, in my highly-scientific sample of two offspring, the evidence is clear that our down payment gifts have not created "economic dependence." Both kids are earning more money, saving more money, and have accumulated WAY more money than DW and I did at their ages (now 31 and 28). As I said before, we were thrilled to be in a position to give them that boost right out of college, and now to see the positive effect that it's having on their early adulthood.

[kannon]

Quote:

Originally Posted by HadEnuff I don't know if this is the type of advice you are interested in or not, but I thought it was valuable when I read it, or something like it in the book "The Millionaire Next Door". It goes something like this: While it's nice to help your kids get into a home you should consider a few things. Why haven't they been able to save up enough for themselves to get a home yet, without your help? One valuable lesson learned in accumulating the 20% down, and the other incidentals, is that it demonstrates that they have enough income, AND can live below their means enough to accumulate the cash. When we help our kids into a home, we are also helping them into a neighborhood. What will the temptations to spend be like when they meet their neighbors who have been able to save that money, and belong to the local country club, or their kids go to the expensive summer camp, or drive nice cars, have nice furniture etc. etc. If they haven't been able to save the 20% plus other costs, how will they handle unforeseen expenses, such as broken HVAC, plumbing issues, etc. etc. that come with home ownership? I'm not saying you shouldn't go there, but these are issues to consider, IMO.

Understand and point taken. While they could move into a small starter house with our help they could move into a home with more features and better neighborhood/schools. I wish my parents could have given us a nice gift to get into the home of our dreams, instead of us taking the longer/more expensive/more hassle route to finally get to where we originally wanted.

[pb4uski]

Quote:

Originally Posted by kannon ..... I wish my parents could have given us a nice gift to get into the home of our dreams, instead of us taking the longer/more expensive/more hassle route to finally get to where we originally wanted.

A home is a place to live.... you seem to be romantizing it too much.

[kannon]

A home is more than a place to live .,..

[HadEnuff]

Quote:

Originally Posted by kannon Understand and point taken. While they could move into a small starter house with our help they could move into a home with more features and better neighborhood/schools. I wish my parents could have given us a nice gift to get into the home of our dreams, instead of us taking the longer/more expensive/more hassle route to finally get to where we originally wanted.

I would try to find a way that minimizes the tax hit on your 401k, if there is a a way to do that. Very much like DW and I are trying to figure out how we'd finance a 2nd home for ourselves. So far we haven't decided IF we really want the 2nd home, nor have I figured out a way to do it without paying more taxes on a 401k withdrawal than I would want.

I can't say I'd be in love with the idea of becoming a landlord, although if I did, I suppose to my children would be a good way to do it.

I totally understand about wanting to help the kids while you are around rather than waiting until you are gone, and they are old.

Best of luck moving forward.

[Badger]

In the divorce settlement I was able to raise the money to keep the house. It meant I had to give up everything we jointly owned (my half of savings, furniture, and some land as well as assume care taking of her dog). I also had to borrow money, about $8k, that my parents offered. it was the early 80s and an inexpensive house and I was single with a low pay teacher job. I made monthly payments with interest on which we both agreed. Since the money came from their retirement savings I made sure they were paid the first of the month without fail. I got the house but the only furniture for 3 years was a bean bag chair and a mattress on the floor. I'm still in the house 35+yrs later (with more furniture.
Maybe you could do the same. The houses would be theirs and their responsibility without you becoming a landlord with all the potential unforseen problems that come up. They are then in control of their own destiny.


Cheers!

[iloveyoga]

Quote:

Originally Posted by W2R This entire topic seems completely foreign to me because my family just never does things like buy houses (or even down payments) for kids. In my family, we value independence, responsibility, and initiative highly. My parents never "helped" me via large gifts like this. I did get to take my clothes with me when I left home! That was all, though - - no college paid for, either, which made me angry and inspired me to get not one, but FOUR degrees without their help. There, I showed them! . Basically, in my family when you are 18 you are on your own. It's tough but it fosters a great sense of self confidence when you know you can survive and do well completely on your own. Likewise I never "helped" my daughter by giving her a house or down payment (thus likely sapping her initiative to save for one on her own), although I did give her some minimal help with college expenses as long as she worked part time for the rest. She learned to LBYM and she is doing fine. Right now at age 42 she is saving to move up from her starter house (which is about like my house), to a nicer one. I am not saying that this is what you should do, but just thought it might be interesting to mention different family cultures and attitudes towards these lavish gifts.

This is more our family culture too. If you buy your own house, it is more likely to be something you can afford long term.....

[Rex]

Here is what we did....so far, so good....

For DS, I'm a co-applicant on his mortgage. This allowed him to qualify and it was before I RE.

For DD, we became the mortgage company. The closing attorney drew up a note and we are lien holder.

Because they are both young and single, they both have rent paying roommates & that covers their mortgages. This is allowing them to get ahead much sooner.

They are both "good risks" and with DD, it's turning out to be a good investment for us.

[sengsational]

Putting an offspring in something they otherwise couldn't afford is of course a soundly bad idea, as the MND based comments are saying, because of that keeping up with the Joneses aspect. But if my kids wanted to make a deal that would put them in a position to save more, rather than spend more, I'd go for that. The comment about loaning enough to get out of PMI, for instance, as long as that didn't expand the search to a higher priced house.

[Bamaman]

Our granddaughter is a single mother, and there's a state program that meets her 50/50 on cash down payments. We're going to give her $5K and the state's going to match that with $5K for a down payment.

That's very reasonable in our eyes. We also have a bunch of furniture to give.

Do yourself a favor and just give them what you can afford to give the couple. Then, let them handle the rest of the purchase.

Sometimes it's time to stand on your own two feet as a young adult.

[GravitySucks]

Quote:

Originally Posted by sengsational Putting an offspring in something they otherwise couldn't afford is of course a soundly bad idea, as the MND based comments are saying, because of that keeping up with the Joneses aspect. But if my kids wanted to make a deal that would put them in a position to save more, rather than spend more, I'd go for that. The comment about loaning enough to get out of PMI, for instance, as long as that didn't expand the search to a higher priced house.

I have to disagree.
DD2 works hard plus drives Uber to make ends meet but still cant qualify for a mortgage. I have made peace with the fact she will never be a high or even medium earner. She still deserves to live in a safe neighborhood and the rent in a decent neighborhood is more than taxes and interest on a home. I see no harm in giving her part of her expected inheritance now instead of when she, hopefully, is 60.

[aja8888]

Quote:

Originally Posted by GravitySucks I have to disagree. DD2 works hard plus drives Uber to make ends meet but still cant qualify for a mortgage. I have made peace with the fact she will never be a high or even medium earner. She still deserves to live in a safe neighborhood and the rent in a decent neighborhood is more than taxes and interest on a home. I see no harm in giving her part of her expected inheritance now instead of when she, hopefully, is 60.

We are doing the same with DD since she won't ever be a high earner, but is a diligent saver and spends wisely. We are giving her the money she needs to get into a small house rather than leaving her an inheritance "someday". She will inherit a nice sum. though, but hopefully not soon!

[kgtest]

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Originally Posted by kannon Morning We would like to help our children get into a house of their own. They both have good jobs and are saving up. We are retired with what I believe is available 401k funds that could be used to help them get into a home. Right now this 401k money is about 30/70 so I know that Bonds/Cash are not doing the greatest. So thinking use some of the Bonds/Cash in real estate investment to get a better return. So ... some options I have been brainstorming: 1) help with down payment/closing cost. Straight forward, helps the kids get into a home sooner than later. In my mind puts 401k Bond/Cash into a real estate investment so, while not helping our investment return, for the overall family it's a better use of the money. 2) do a seller finance mortgage. We basically become the mortgage company, charge a reasonable interest rate - and for right now that be better than bonds/cash. So an improvement . 3) now this is the one that I find intriguing as I have never venture into this and I think some folks on here have. We purchase a second home as a rental property investment, and have one of the children as our tenant paying reasonable rent. By my estimation, I can offset the income with interest payments, property tax, repairs, and depreciation. I believe this would reduce our overall tax bill (as rental income be less than all expenses) and we get real estate appreciation (vice Bonds/Cash from the 401k). So .. appreciate any thoughts or experiences parents have done on here to help their kids. I have no worry about the kids paying rent or maintaining the house, they are good kids, just trying to help them out now rather than later when they inherit our estate. Thanks

My ole man used option 3 with a twist. When it came time to buy my own home when I wanted to "sell" he gave me a check for our equity and we ACTUALLY bought our first home. That was about 2 years after we had been paying him rent, the home had appreciated maybe 12k and so that's what we had to start for a downpayment on our very own home. He got the tax benefits, we got the equity, and he kept the property and its now paid for and he collects rent automatic deposit each month.

EDIT to add, besides growing up in a loving, stable and fun family...my ole man giving us that equity check was probably the single biggest help in terms of tools to get us going on building wealth. We not only then saw the potential ourselves of Real Estate, but we've also helped manage it from getgo, and also spent $ and time adding sweat equity to it.

[sengsational]

Quote:

Originally Posted by GravitySucks I have to disagree.

That's cool because as much as one may wish to generalize about how, in many circumstances, putting a low wage person in a mid wage neighborhood "causes" that person to spend more than they would have if they bought a house they could afford independently (as Millionaire Next Door posits), those are still generalizations.

I wouldn't do it for my kids, not because I think they'd spend more / save less by trying to keep up with the Joneses (they're both level-headed about spending and saving), but because I believe that it would be difficult to keep from comparing themselves to their better-off neighbors. Day in, day out, seeing little things that make them realize they've got a little less than their neighbors seems like it's not a healthy way to live.

[Kroeran]

My dad could have taught wealthy barber a few tricks.

His view was that a fat mortgage payment that stretched us would impose savings discipline.

We were strong on income and weak on savings.

Family both sides spotted the down payment. I had to pay back my side with interest.

We quickly paid off that first place in an awkward part of town and then that equity was the down payment for the nice house in a convenient neighbourhood, bought during the market blip the week after 911.

Paying down a mortgage seemed more satisfying than saving up to start while watching house prices outpace us.

My recollection is that Die Broke is big on helping kids with foundational investments: education, first homes, establishing businesses, rather than inheriting a pot of gold when they are 60.

[lauradrops]

My son started talking about buying his first property when he was 24. He was watching his friends pay rents of 2500-3500 a month to live in a tiny space with roommates. (nyc area)

He is a good saver but his salary was just OK being only 1 year out of school. We had made him a deal that worked out well. We told him if he could save x amount in a year that we would help him with a down payment. Our thought was to see if he was responsible enough to save what would likely be his monthly payment.

He did indeed save that amount and showed us he was serious. Now being NYC area, he was looking at co-ops. At 25 he bought a very nice studio apartment in Westchester. With our gift, he was able to put 25% down and have a very reasonable payment. That was about 5 years ago and because of principal payments every month he has about 13 years left on his 30 year mortgage.

The money we gave him was money well spent!!

[Chuckanut]

Quote:

Originally Posted by W2R This entire topic seems completely foreign to me because my family just never does things like buy houses (or even down payments) for kids. In my family, we value independence, responsibility, and initiative highly. My parents never "helped" me via large gifts like this. I did get to take my clothes with me when I left home! That was all, though - - no college paid for, either, which made me angry and inspired me to get not one, but FOUR degrees without their help. There, I showed them! . Basically, in my family when you are 18 you are on your own. It's tough but it fosters a great sense of self confidence when you know you can survive and do well completely on your own. Likewise I never "helped" my daughter by giving her a house or down payment (thus likely sapping her initiative to save for one on her own), although I did give her some minimal help with college expenses as long as she worked part time for the rest. She learned to LBYM and she is doing fine. Right now at age 42 she is saving to move up from her starter house (which is about like my house), to a nicer one. I am not saying that this is what you should do, but just thought it might be interesting to mention different family cultures and attitudes towards these lavish gifts.

A lot depends on where you live. If you live in a high housing cost area and want your kids to not have to move a long distance away where housing is more affordable, it might be in your best interest to help them get into a home. OTOH, they could buy the home with your help, keep it a few years, sell it for a bundle and move to Faraway, NV.

[seraphim]

A lot depends on the kid. We have one son, but being independent is important to him. It bothers him to receive help. So a couple years out of college I mentioned his high rental costs, which got him looking and doing his homework. When he mentioned down payments, I let him know there was enough money left in his education fund for a down payment. He accepted that. It’s good for his credit score, and he does know he has a safety net, even though he hates using it.