How to Help Children Get Into a Home

[kannon]

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

 

[HadEnuff]

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]

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]

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]

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]

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]

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]

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.

 

[tulak]

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.

This assumes your neighbors are all wealthy. In HCOL areas, that’s not always the case. I know in my area, many home owners bought when prices were much lower. They may have a lot of equity in their home, but otherwise there’s little difference in income/spending (excluding housing costs).

I think about how to (safely) help my kids too, even though they are younger (still in college). For DS and his girlfriend, I’m letting them live with me rent free so they can save for a down payment. We live in a HCOL area and instead of paying a lot of money for rent, I’d rather see them save this money and eventually buy a place of their own. I have no idea how this will work out, but I figure it’s an easy way for me to help them get started financially.

 

[txtig]

Our younger son just closed on his first home at the end of July. He probably had enough money to do it on his own, but it would have taken nearly every dollar he had, with nothing left for any needed improvements.

I offered him a gift of $10k toward his closing costs, which he at first declined, then wanted only as a loan, but eventually accepted as a gift.

One cautionary note about loaning money to a child for their down payment. The mortgage company wanted to know the source of the $10k that they saw was deposited into his account. I had to sign paperwork stating that it was a gift and not a loan. They don’t want their borrowers taking out side loans for the down payment.

 

[kgtest]

Our younger son just closed on his first home at the end of July. He probably had enough money to do it on his own, but it would have taken nearly every dollar he had, with nothing left for any needed improvements.

I offered him a gift of $10k toward his closing costs, which he at first declined, then wanted only as a loan, but eventually accepted as a gift.

One cautionary note about loaning money to a child for their down payment. The mortgage company wanted to know the source of the $10k that they saw was deposited into his account. I had to sign paperwork stating that it was a gift and not a loan. They don’t want their borrowers taking out side loans for the down payment.

Good point. A gift, is a gift. My ole man and the in laws have both given substantial 10k gifts in our lives. Its allowed me to live a better quality of life, get away from the city and now raise my own family in a neighborhood I otherwise would not have ended up in. Yay Gifters! Yay me! Some do question if I have financial 'sense' in my family but sometimes jealousy can come in an ugly disguise.

 

[Rustic23]

OK, I did not read all the comments.

However, NEVER NEVER NEVER, lend money to family!!!!! Yes it may work out, but there is an even greater chance at sometime or another things will turn south, and you loose your money and your family. I speak from experience.

Give them the money, but don't lend to family ever.

 

[Happyras]

I can't resist posting, as this topic hit home for me.
First, you can not buy and then rent a property to your child to take deductions against the rental. I believe the IRS considers that a self rental and its disallowed, just as you can not use a vacation property and rent it only a few weeks.
Second, if you loan the money the interest is required to be per the gov published rate and must be declared as income.
Now, in retrospect, I might have not done what we did for our two daughters, but as the point was made, I would rather have 20 years left with my grand-kids raised in a nice home rather than dropping millions on them late in life. I guess that is selfish of us. But then, I guess we will still have that problem.

If you gift it slowly, they use it for the best. If it ends up as a trust distribution they may not know how to spend it wisely.

Our youngest daughter finally got married on Sunday after 3 cancellations by our Governor. 2 years ago we chose to provide her and her fiance' the same that we provided her sister as a DP, but we then also financed the whole home purchase.

Her sister, a few years prior, and her husband were given a large DP but they had to go finance on their own. They were able to buy a repo in a high end neighborhood at that time. It is worth 2 hundred thousand more. They otherwise would have missed that opportunity.

I made a mistake and gave them the job to manage one rental and collect income as they now were short of cash due to both house payments and daycare. At first they did their best, but they placed a nightmare tenant (drugs, homeless, criminals, violence, destruction) and of course there was no rent. The socialist state of WA allows the homeless and drug dealers to use your property for several months (currently indefinitely due to Covid).

Point is, they did try, but it was beyond them to manage a property, their own home and work and perhaps too soon for them to own a home directly. My expectations were too high, but our attorney took care of the eviction mess. Perhaps they were just unfortunate in selecting the tenant.

I do have to say that with all the learning curve required for home ownership, they have really come a lot farther than continue to rent.

We have no regrets, but we are getting a little wiser on how we provide support. The youngest has now saved a substantial amount and I am encouraging them to consider renting their home and buying another!

 

[lauradrops]

Ours was a gift and not a loan. We did sign a paper saying as much.

College was another story. 2 of my 3 are finished with college. Our deal with them was if they started out at a community college for 2 years and then went on to state school we would pay for their Bachelors Degree. If they went away for the four years, we told them they would have to have some skin in the game. That way if they partied to hard and failed any classes, the class they fail would be one they are paying for and they could foot the bill again.

They both went away to state schools for 4 years, so both came out with student loans of about 25K. And happy to say neither failed a class.

Now graduate school was all theirs.

 

[Katiek]

I vote with the people who say don't lend money to family. Options 2 and 3 strike me as troublesome, especially if the kids later change their mind and don't wan to live there, or if they lose their jobs and can't pay the agreed amounts. This can also affect the relationship with the son/daughter in law who may feel uncomfortable living in a house they rent from an in law.



If you have the money to give them a gift, maybe match their down payment so they have shown they can save for a purpose and they have some "skin" in the game. But if you can't afford, or don't want to make it, a gift - I'd stay out of their house purchase.

 

[Retired Expat]

You can’t buy investment real estate with 401k funds but you can with an IRA. You could rollover the 401k into an IRA. One caveat you can’t actively manage the property so you would need a property management company to collect the rent and pay the bills.

From an investment point of view Real Estate has been very good for me!

 

[EastWest Gal]

I’m in the camp of helping with the down payment as a gift, but I think that’s because we have one exceedingly well behaved only child who is frugal to a fault. If he were a spendthrift or partier we would feel differently.

It seems that the best use of generational wealth is teaching money management, helping getting started in responsible adult life through a better education, getting started in a home, and helping fund retirement accounts, than a sink or swim method followed by inheriting money late in life, and not being able to handle the money well.

 

[wolf]

In similar situation. Option 3. You become landlord. Check out IRS rules, when renting to relative. You must charge going "rate", (less 10-20%) if you want to claim rental deductions. ie, mortgage, property tax, depreciation.

Thought, use "gift tax", rule to get around. Again, read IRS rule. Not allowed.