Helping Your Adult Children Enter the Real Estate Market
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With the significant increase in real estate prices in major cities across Canada over the last decade, entering the real estate market as a millennial first-time home buyer can feel like an impossible feat.Limor Markman
The soaring prices of property coupled with the fact that mortgage rules were tightened significantly in October of 2016, have made it even more difficult to acquire a large enough down payment and qualify for a mortgage. These are two major obstacles in the transition to home ownership.
According to the Canadian Mortgage Housing Corporation reports released in the Fall of 2016, the Canadian Real Estate Market appreciated by 12.5% in the last year. The same report cites the average property price in Toronto as $745,984, Calgary as $468,116, Montreal as $348,066 and Vancouver at $1,058,696. Purchasing a home in one of Canada’s urban centres is exorbitantly expensive and as a result largely out of reach for millennials today. Millennials place a great deal of value on lifestyle and prefer to spend as little time as possible commuting, which makes the option of purchasing a cheaper home outside of the city less desirable.
As a result, how can younger generations actually afford to buy a home?
This is why millennials often turn to family for financial assistance. Most parents would like to help their children transition to adult living and see them achieve financial success. According to a Ratehub study released in January 2017, 35% of first-time home buyers in Ontario and 45% in Quebec receive financial help towards the down payment of their first home from their families.
The challenge however, is that many Canadians with children in their 20s and 30s don’t have enough money to fund their own retirement, let alone sacrifice thousands of dollars and its compounding growth potential.
This was demonstrated by a study completed in 2016 by The Broadbent Institute, a Canadian independent research organization. The study found that only 18 percent of seniors without employer pensions, have enough money saved up to be comfortable when their government benefits are activated. This indicates that many Canadian parents are not preparing sufficiently financially for retirement.
Deciding between your own financial stability and your children’s can be quite the predicament. It can become even more of a dilemma in a family where more than one child might need assistance.
Solving this challenge definitely requires re-evaluating some conventional thinking about home ownership. There is a solution worth considering that enables you as parents to continue to save for your retirement with strong investment returns while still helping your children enter the real estate market.
Instead of buying a home for your child to live in, consider instead the purchase of an investment property for rental.
There are many benefits to purchasing a rental property before or in place of a primary residence. A rental property can be purchased on the outskirts of the city, where housing prices are more affordable and sometimes the average rent rate is still high. This combination of factors makes affording the down payment and qualifying for the mortgage more feasible.
When a rental property is purchased, once the down payment funds are contributed, all future costs, which include mortgage, insurance, property tax and maintenance, should be covered by the rent, which is paid by the tenants. Over time as the mortgage payments are made, equity is accumulated. The investment property will become a source of forced savings as well as appreciate in value if the real estate market rises.
If the investment property is purchased in a sound location based on proper research and evaluation, there should be money left over after expenses every month, known as cash flow or passive income.
The cash flow can be distributed in a number of ways, which caninclude bolstering your retirement, or easing the many financial priorities of early adulthood for your children. Keep in mind that funds can be redistributed as required.
Another benefit of an investment property is that instead of helping your child buy a first home, you are giving them the ability to rent in a desired neighbourhood, help them maintain flexibility in their life, and avoid being “house poor”.
Of course with any investment there is risk. Conducting proper market research and tenant screening is critical. In addition, sufficient contingency funds should be set aside to cover repairs, vacancy and property management if you choose not to manage the property yourself. Before purchasing your first investment property, it is important to understand your rights as a landlord in your province.
Investment properties create a unique opportunity for families to come together and generate financial gain for all involved. Parents won’t have to choose which child gets the financial assistance for their down payment or sacrifice their own financial future.
In fact, since the tenants will be covering all the costs by way of paying rent, and since equity is accumulated through mortgage pay down, it may not take very long before a second family investment property can be purchased.
With the unconventional approach of purchasing investment property instead of writing a cheque towards the down payment of a millennial’s first home, they’ll still be given the opportunity to enter the real estate market. Even more significant but less obvious, is the lesson and experience younger adults will gain by investing in real estate and generating passive income. Knowing how to generate additional income will serve them and future generations for years to come.
As for you, you won’t have to choose between which child to support or your own financial future. You’ll further diversify your portfolio with real estate and potentially strengthen your own returns.
Andrew Carnegie, the wealthiest man in America in the early 20th century commented that, “90 percent of all millionaires became so through owning real estate”. The journey into real estate investing starts with making your first purchase. If you want to retire comfortably and set the next generation up for future financial success, setting your sights on investment property and generating passive income is a goal we should all be aspiring to.
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About the author: Limor Markman is a real estate investor and money expert who dedicates herself to empowering women to live an unapologetically Financially Fabulous life!