A couple of years ago I read a news story about a woman from China who bought an apartment in New York City for $6.5 million. She bought it for her two-year old daughter and plans to hold on to it so that when the child grows up and attends an American university, she’ll have a place to call her own.
Must be nice, right? How many of those 8,200-plus students who pay $9,000 to more than $10,000 to double up in one of UW’s 19 residence halls would like a sweet deal like this?
Let’s take a look at what the experts say.
Fears of creating a financially-dependent monster
Many parents worry about fostering financial dependency when helping their adult children financially. How your child deals with your generosity, however, has to do with his or her maturity level.
A young adult with a strong sense of responsibility may just treat the gift as a way to jump-start self-sufficiency, according to Ronald J. Greer, author of “Now That They Are Grown: Successfully Parenting Your Adult Children.”
And, there are degrees of assistance that may help reign in any monster who tries to take over.
Types of help
The degrees of assistance in purchasing a home for your child take a number of forms. Aside from an outright purchase, consider the following:
- Assist your child by paying the down payment and/or closing costs on a home of his or her own.
- Use a share-equity agreement when purchasing the home.
- Create a loan for your child to purchase the home, offering lower interest and softer terms than a lender would.
Let’s dive a bit deeper into these strategies:
Gift your child the money
The easiest of all three scenarios is to just give your child the money for the down payment and closing costs. “The reason I recommend a gift rather than a loan is because, quite simply, it’s cleaner. Friends and family should be friends and family. Banks should lend money,” says David Weliver, founding editor of Money Under 30.
The share equity agreement
In a nutshell, this arrangement requires splitting the costs for the home purchase. You’ll need your attorney’s help to draft the agreement that states that your child “must pay a proportional share of the mortgage payment as well as expenses, such as insurance and property taxes,” according to the experts at Investopedia.
The parents, as the investing party, are typically the ones to deduct on their taxes their expenses as well as mortgage interest, taxes, insurance and other items. Finally, the money invested will hopefully be recouped when the child sells the home.
Loan your child the money to buy
You’ll need to work with your lawyer on this one as well. He or she will draft a loan agreement stating that you are loaning your child the cost of the down payment and closing costs and add a schedule for repayment.
Even if you have no intention of ever taking your child to court to enforce the agreement, a legal document is a must if you hope that your child will take you seriously.
Not all parent/child relationships can tolerate the added stress of the lender/borrower relationship, but of yours can, it’s the ideal way to provide housing security for your offspring while investing toward your own future.