Last week, I wrote about ways to help your children become homeowners. Given the cost of real estate in many parts of the country, young people may have a tough time affording a place. Following the article, I received many e-mails, some critical – for different reasons – of helping kids buy real estate, and some offering up other ideas they've used to help their kids buy a home. Today I want to share some highlights of what readers shared with me.
"Tim, this is not the time to be buying real estate. Offering a myriad of ways to buy a home in this market is ridiculous," one reader said.
There's no doubt that real estate in certain markets around the country is expensive. You can debate about where future prices are going, but even if values decline by, say, 20 per cent, many children will have difficulty saving the down-payment or earning sufficient income to finance a purchase. So, the decision to help the kids or not is not so much a timing issue as a values issue (as in, what you think is important).
"Teach your kids to work hard and save up. No wonder this generation feels entitled," one reader shared. Another said, "I'm not convinced that owning a home should be the dream of Canadians any more."
Every parent will have their own views on whether they should help a child buy a home. For every parent that chooses not to help, there's another who thinks it's important. I still believe home ownership makes good sense in the long run. Home ownership provides a tax-advantaged way to invest, and desirable property is a scarce resource. For those who do believe in helping their kids to become homeowners, consider the following stories of how some parents made it happen.
Wendy and Bill have a son, Graham, in his late 20s. Graham is educated, has a good job and is living with Wendy and Bill, who help him with serious medical needs. Graham is paying them rent, but due to an interrupted work history and medical expenses, he's not in good financial shape, although he's saving to buy a condo.
Graham had a total of $40,000 in unused contribution room for his registered retirement savings plan (RRSP) and tax-free savings account (TFSA). Wendy and Bill helped Graham by lending him $40,000 to make contributions to both plans. They're giving him guidance on how to invest the money, and they've set up a promissory note for the $40,000 he owes. As a family, they're saving more tax by enabling Graham to use his registered plans. Graham has also moved much closer to his dream of buying a place to live, and he feels more independent. Wendy and Bill are not charging interest on the loan, and may forgive it one day, but could also demand payment if they wanted to.
Now consider Jack and his daughter Sarah. Jack wanted to help Sarah buy a small home in their town. Sarah is working full-time as a nurse, can afford monthly mortgage payments, and has saved up a little for a down payment. Jack has accumulated assets in his RRSP above what he'll need for retirement and wanted to help Sarah. He did this by setting up a non-arm's-length mortgage whereby his RRSP lends money to Sarah, secured by the real estate she is buying. He set this up through Canadian Western Trust, which collects the monthly payments and does all the paperwork (some other institutions will do this, too). Jack set the interest rate on the mortgage, paid a one-time nominal set-up fee, will face annual fees of about $400, and had his lawyer involved in drafting up the mortgage documents. Thanks to her father, Sarah avoided the requirement for an insured mortgage.
Finally, there's Frank and Sue. They have four children and wanted to help each buy a first home. Two of the kids have done this already, and two have not. When each child is ready to buy, Frank and Sue have helped by paying a portion of each mortgage payment for each child. They have capped the total support they will provide each child at the same amount, $100,000. Each child is free to purchase whatever size and price of home they want, and must arrange their own mortgage, but each month a portion of the mortgage payment comes from the bank account of Frank and Sue. This has allowed the couple to help their children without a significant capital outlay all at once. They have helped over time.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.