How to Help Children Get Into a Home

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kannon

Recycles dryer sheets
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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
 
I bought my first home mortgaged by my folks. As I was preparing to buy, my folks, that keep all their savings in CDs mentioned a few CDs renewing that would cover my purchase so I suggested they finance my loan. I paid market rate interest; they earned much more interest than they otherwise would have, I saved on all the BS bank fees. Win-Win. The mortgage was recorded and I deducted the interest and they paid interest on the income. Paying interest bugged me less knowing the money was going to my parents rather than the bank. They lived out of state but it was easy working with the title company to draft and record the note and mortgage.

Was clean and worked well.
 
I think their jobs are secure but in today's weird environment, who knows. I mean healthcare workers are getting furloughed. One is a contractor for the federal gov't, the other is in Information Technology/Network Administration. If they lost their jobs, they have emergency funds for about 6 months. But that doesn't mean we wouldn't help, and that 's doable for the short run. But I believe they would try their hardest to get new job and take care of their obligations.
 
First things first - have they even hinted they want help? Either way, have a good long chat about their needs and finances first - they sound like they are in good shape.

Be very careful of overstepping here, as interfering (if well intentioned) in laws. Even if your kid says it's welcome, the other might not feel so inclined, so you have a chance to create a problem that doesn't currently exist. (one gladly would take help, the other would rather not = riff)

My in-laws in my first marriage "surprised" me with a new car. I didn't want it, I didn't want to feel indebted to them. I wouldn't want to live in my in-laws rental either. It's not great for establishing adulthood, imo.

After my less-surprising divorce, my own parents helped me out a tiny bit when I bought my own place, like $5k tiny bit. They have always been financially very secure, but not big on throwing cash at us, never have been. We talk money frankly and share successes and tips.
 
I think it's nice to help them out. Taking full cash purchase out of your 401k will cause tax hit. I suggest the option of you buy the house with mortgage, and rent to them. You can have an agreement that they accumulate equity in the house over time, or just plan for inheritance. You get some advantages of the rental, you save on the tax bite vs full 401k withdrawal, they get a nice house with favorable rental conditions and future ownership.
 
Just realize that if you take a big withdrawal from your 401K (perhaps to fund the purchase and make a mortgage loan to your kids) you're going to have a large tax hit. Generally on tax deferred you'd rather take smaller yearly withdrawals or Roth conversions.

My son is considering buying now, and I will likely help him in some way. https://www.early-retirement.org/forums/f28/financial-help-for-child-to-buy-a-house-104553.html is the thread I asked for opinions in. That decision is still on hold right now.
 
I vote to keep things simple and go with #1. As I get older I want my financial life to be simpler. I would not want to deal with being a lender, even for relatives, and have to deal with potential situations that could strain the relationship. I was not born with the "landlord" gene, even for relatives. My FIREd life is quite happy with below average market returns. Yes you take a tax hit from your 401k, but folks always seem to forget the tax and matching contributions benefits they received by using a 401K.
 
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Being a 'landlord' might change the relationship in ways that are not fully understood by all parties. Things might feel different for all parties.

Though I am a math nerd, etc - sometimes, the right 'math' decision is not best overall.

There can be changes that life throws at someone in this situation, that causes the ideal situation to be very compromised. The relationships that exist now might have a negative impact of those changes.

I think keeping business, business and family, family is healthier - long term.
 
How does number three help your children get into a home of their own? They are renting from you.

Do you want more income from your 401 or the get your kids into the housing market? Pretty different goals ...think through a little more about your end desires and then make a decision.

Personally I would only consider number one, which is what we did. Each daughter had well over 10% in a down payment and we rounded up to 20 to avoid PMI.
 
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! :LOL: 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! :ROFLMAO: :2funny: . 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.
 
Understand about the tax hit.

The way I figure kids get our money now or later. And I like the idea of seeing their happiness and security vice being six feet under.

Options one and two they own the house. Option three the thought was after we are gone the house passes to them. So renting helps our tax situation and the appreciation of the house is good for us now and them later.

Understand about relatives concern. They both are saving up for a house so we know that they want to be homeowners.
 
We helped both kids get into a house before they were able to buy. In both cases, we bought the house outright with cash and rented to them. The rent covered property tax, insurance, and 5% return on invested capital, to compensate us for pulling the money out of equities in our taxable brokerage account.

In one case, DS and DDIL only lived there for 3 years when they decided they were ready to buy a bigger house. We sold the house and gifted them all net profit. This, combined with their own savings, was enough for a 20% down payment on their new house, plus some improvements they made right after moving in. We got our original investment back and returned it to the investment portfolio.

In the case of DD, she's lived in the house for 8 years with her boyfriend. Same deal on rent. She's now been approved for a mortgage and we are in the process of selling it to her. The sale price is set at FMV to keep Uncle Sam happy. But again, we will gift her all net profit, which she'll combine with her own savings for a 20%+ down payment. So in effect, she's getting the house at our original cost, plus selling costs and taxes. And again, we get the original investment back into our portfolio.

Relationship-wise, this was no problem at all for us or the kids. They were thankful that we were helping them out. And we were thrilled to be in a position to help. They each got into a nice house right after college, with rent that was less than what they had been paying for a crappy apartment. We gifted them all appreciation to fund the down payment on purchase and avoid PMI. We got a nice monthly cashflow of 5% ROI along the way, which was a healthy "dividend rate" and paid a lot of bills.
 
If you have enough in taxable account money to do #2 then I would consider that. The young couple who bought our house were financed by her grandparents. The other advantage of #2 is if your child is married and the marriage later falls apart, then you (and your child) are in a better position because you have a lien on the house.

I would not take a big tax hit simply to raise funds to help the child. If you don't have enough in taxable funds, perhaps supplemented by some 401k withdrawals at a reasonable tax cost, to do #2 then I would do #1.

Another possibility is to loan them the money for the downpayment as a no interest gain participation second mortgage... the mortgage would be behind the first lien and wouldn't be due until they sell and at that point what would be a portion of the sales proceeds. So for example if they buy a $250k house with $50k from you to avoid PMI and then later sell it for $350k net proceeds at closing you would receive $70k ($350k proceeds*$50k lent/$250k cost of house). When the time comes you can always decline the $20k kicker or flip it into a new house if they are buying another house.
 
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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.
 
kannon said:
The way I figure kids get our money now or later. And I like the idea of seeing their happiness and security vice being six feet under.
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This is my feeling too.

Each case is different. You don't want to create a sense of entitlement, but in other cases just because you help them out doesn't mean they don't know the value of money. I have considered the other issues raised.

One thing of note financially, especially with mortgage rates so low, is that if I can help my son with the down payment, the monthly mortgage payment should be lower than the rent he's paying now, so it will help him create an emergency fund and save for other things.
 
kannon said:
Understand about the tax hit.

The way I figure kids get our money now or later. And I like the idea of seeing their happiness and security vice being six feet under.

Options one and two they own the house. Option three the thought was after we are gone the house passes to them. So renting helps our tax situation and the appreciation of the house is good for us now and them later.

Understand about relatives concern. They both are saving up for a house so we know that they want to be homeowners.
Click to expand...

Your call... however option 3 is a little bit like the carrot or the stick approach..IMO anyway...they are still paying for the house with rent but need to depend of your intent at dying to actually own it. .
 
HadEnuff said:
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?
Click to expand...

+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.
 
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.
 
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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.
 
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HadEnuff said:
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.
Click to expand...

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.
 
kannon said:
..... 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.
Click to expand...

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