Assisting Children Into Property
With rising house prices comes pressure on parents to assist their adult children onto the property ladder. This seemingly generous act though can be fraught with issues; legal, tax, financial, and scariest of all…family.
So what are some of the things to confront and what are some of the do’s and don’ts of helping children into properties. Parents often have three primary fears when offering children financial assistance. 1. Will I destroy my child’s work ethic? 2. Will the money be lost if my child’s relationship fails? 3. Can I afford to do this without jeopardising my own future?
The place to start is to examine your own ability to cope financially with the expectations your children may have for assistance. Reflect on the number of children you have and the need to act fairly. What you do for one you must realistically do for all, even if some are financially independent and some are not. A successful independent child who may not express concern at assistance provided to a less successful sibling will certainly retain an expectation that this assistance will be balanced somehow, some time.
Determining how and when you will balance the ledger with all the children is a conversation that should generally be out in the open. Ideally had in an environment where everyone can table and express views freely. It sometimes helps to have this conversation formally, with a chairperson and in an environment like your accountants office rather than around the dinner table.
If the family trust is involved, this conversation should take the form of a formal trustee meeting.
In my experience parents often look to provide more assistance than they can easily afford to give. It is not uncommon to see parents willing to re mortgage their own home to assist their children into a property. Many folks do this with an expectation that the children will “pay us back” and all will be well. Consider though your children’s history of repaying loans from you. If there is a history of excuses and underperformance assume you will continue to get what you have previously got.
The bottom line is you should generally not provide assistance that you can’t afford to lose, ie assume the funds are never returned and set the benchmark accordingly. Don’t worry if the assistance you feel you should provide is less than their perception of what they need. If they want a property badly enough they will alter their expectations of their starting point or simply keep saving. Don’t place yourself under pressure when this is pressure that is healthy for them to manage themselves.
Be careful to ensure your children maintain realistic expectations of where they should start on the property ladder. Resist the pressure to assist them into an unnecessarily expensive property. Applying property investment criteria to an acquisition and determining what the backstop position would be if the house had to be rented is a good way of determining an appropriate acquisition. That tired little house that could give a reasonable yield done up probably doubles as a suitable first home.
This brings me to the next vex question. What form should the assistance take, will you buy the property outright and own it yourself giving the children the right to live in it now and buy it later? Will you enter into a shared ownership arrangement with the children? Will you just give them the money? or will you simply be the bank and lend them some or all of the money required, if so what will the terms of the loan be and will you get security for your money ?
There is no right or wrong answer with this but having observed many different approaches with many different outcomes I have personally come to favour the “be the bank” option leaving the kids to own the property outright. In the next issue Mark will show the ‘Why’.