rear view of dad holding a little girl in his arms and showing her a house

Help a loved one buy a home by reviewing strategies and risks

Originally published by Raymond James.

Approaches range from offering a straightforward monetary gift to making the purchase yourself and becoming a landlord. Explore various strategies and their tradeoffs.

Real estate has long been one of the foundational pieces for an investment portfolio. But for younger generations, buying a home has become increasingly difficult. Younger homebuyers face all the same factors of a challenging purchase environment but may not have the ability to come up with a down payment or the earning power to qualify for a mortgage.

That’s where parents and grandparents can sometimes step in – with caution.

Before you open the door

Before you agree to aid a loved one to purchase a home, consider how your decision will affect your own long-term financial plan. Make sure that whatever support you offer won’t interrupt your own goals for the near or distant future, especially your path toward an ideal retirement. You may need to have difficult or emotional conversations prepurchase about why they need your help, what expectations both parties have, and how long-term costs like maintenance, repairs and utilities will be paid.

Choose a strategy

There are myriad ways you can help the next generation in homebuying, and each comes with its own set of parameters. Here are a few to consider, from gifting to lending. With established credit, you may be able to get a better lending rate than a first-time borrower. Your advisor can help you weigh your options.

Offer a monetary gift

  • Straightforward vehicle
  • Taxed as a gift if it exceeds the federal gift tax annual exclusion, up to $17,000 per individual or $34,000 per couple in 2023
  • Need to provide a “gift letter” to lender specifying the amount and transfer date to verify the payment isn’t actually a loan
  • You’ll incur tax consequences if you exceed your yearly gift minimum

Provide a loan or private mortgage

  • Requires careful and detailed documentation
  • Delicate negotiation of family dynamics and relationships
  • Must formalize the loan with contract and schedule of monthly payments and interest as well as any penalties
  • Adds to their debt burden just like any other debt

Loan backed by eligible securities

  • Flexible and offers ready liquidity should a real estate opportunity crop up
  • Securities held in a brokerage account serve as collateral against a loan or line of credit, usually at favorable rates
  • You’ll take some risk and could lose your investments if there’s a default or market fluctuations
  • You can still obtain a mortgage afterward if desired through a technical refinance

Become the landlord

  • You purchase the home with a mortgage or cash and become the landlord, adding to your liabilities or liquidating assets to do so
  • Can help build equity for your children or grandchildren
  • Consider setting aside rent in a separate account to help tenants buy the home later. (Again, just be sure you’re not putting your own financial needs at risk by carrying a loan longer than you truly can.)
  • Requires careful consideration of all potential long-term outcomes

Be a co-borrower

  • You’ll be putting your own credit on the line and your credit could be impacted if payments are not made on a timely basis
  • A last-resort option
  • Could still require a high down payment

Collegiate thinking

For many parents and grandparents, the price of rent for an apartment or house nearby campus is as expensive as a mortgage would be. For that reason, some choose to buy a house or apartment that their children or grandchildren can live in while they go to school. This could be especially advantageous if siblings will attend the same or nearby schools at the same time.

This arrangement can work many different ways. Some have their children or grandchildren pay them rent, which they apply to the mortgage, and then transfer ownership of the property at graduation. Some hold on to the property and continue to rent it to students after their children or grandchildren have graduated and incorporate the rental property into their total portfolio. Be sure to factor in normal, ongoing repair and maintenance costs and insurance as you do your feasibility calculations. There are also the costs and time associated with finding good tenants – including background checks and screenings. If you want to be more hands off or are a long distance from the home, a property manager can be a good way to go. But, keep in mind, they will take a percentage of profits, and you will still be on the hook for any direct repairs that need to be made.

It’s an approach that requires lots of consideration, clear arrangements with your family tenants and a long-term strategy before starting to shop the market. Talk through your strategy with your advisor and accountant to determine what financing vehicles are available and what potential tax advantages would accompany this approach.

Whatever route you choose, look at your long-term plans and goals, do research on the real estate market where you plan to buy, talk to potential lenders and discuss with trusted advisors to make a plan.

Sources: usbank.com; forbes.com; consumerfinance.com; freddiemac.com; themortgagereports.com; wikipedia.org; seekingalpha.com; freddiemac.com; nar.realtor; forbes.com; cnbc.com.

Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

Raymond James Financial Services, Inc., Raymond James & Associates, Inc., and your Raymond James financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

Raymond James Financial Services, Inc., and Raymond James & Associates, Inc., do not provide advice on mortgages.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

Disclosures

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. OnPoint Community Credit Union and OnPoint Investment Services are not registered broker/dealers or registered investment advisers, and are independent of Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc.

Securities and investment advisors services are:

Not a bank or credit union deposit, obligation or guarantee.May lose value.Not FDIC or NCUA/NCUSIF Insured.Not insured by any federal government agency.

RaymondJames financial advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact your local Raymond James office for information and availability.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

Any opinions are those of OnPoint and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

https://www.raymondjames.com/privacy-security-and-account-protection/privacy-notice

https://brokercheck.finra.org/

Related Content


    Note: Email should not be used to share important or sensitive information.

    The security and privacy of your information is important to us. When communicating with us via email please do not send any information that is considered confidential or sensitive in nature. If you need to communicate any personal information (account numbers, social security number, etc.) please feel free to call the number listed in my profile or contact OnPoint Member Services at 503.228.7077 or 800.527.3932.

     

     

    You are leaving OnPoint Community Credit Union.

    The website you are about to visit is the responsibility of the party providing the site. Any transactions you enter into through this third-party site are solely between you and that vendor, merchant or other party. OnPoint’s Privacy Policy does not apply to this third-party site, and for further information you should consult the privacy disclosures of this site.

     

     

    Cancel Accept