The right way to buy a home for your adult kids
When Ashton Paul was looking for a larger home to settle down, he turned to his parents for help.
Mr. Paul, 35, had already proven he could handle the expenses that come with home ownership. In 2009, he gave his parents $70,000 toward a condo they bought for him as an investment property near the Rogers Centre in downtown Toronto. Mr. Paul covered the expenses, including the mortgage, condo fees and insurance, until deciding it was time to buy a home for himself in a more family-friendly neighbourhood.
Last year, Mr. Paul and his parents co-signed the mortgage on a four-bedroom, $800,000 house in Markham, Ont., where he now lives. His plan, once he “saves up a bit more,” is to renovate the basement and rent it out to help with some of the expenses. In the meantime, he continues to rent out the Toronto condo for $1,300 a month and sends the money to his parents.
“Every month, I forward the payments to my parents to cover the mortgage and insurance,” he says.
Mr. Paul is grateful for his parents’ help getting him into the real estate market and how the arrangements were handled.
“There was no contract involved – it was based on trust,” says Mr. Paul, who is a government transit employee. “They know I am ambitious, and they taught me to manage money wisely.”
Many parents today believe the only way their kids will own a home is if they buy it for them or at least co-own the property. For most parents, the goal is to purchase the property and then have the children cover the costs – everything from insurance and taxes to repairs.
Monique Johnson, a Toronto-based realtor with Keller Williams Portfolio Realty Brokerage, has seen a significant increase in the number of parents buying homes for their children. In most cases, the child can’t raise enough money upfront, especially in expensive cities such as Toronto and Vancouver.
“I’m finding that a lot of millennials have the income, but not the down payment,” Ms. Johnson says.
But before considering buying their adult kids a home, Ms. Johnson says parents need to trust the children have the budgeting skills and income to handle the costs. Adult children should also be involved in the buying process, from start to finish, to understand the asset. That includes everything from choosing what kind of property they want and can sustain financially, and in what area.
Ms. Johnson has seen situations where parents purchase homes in neighbourhoods their children find undesirable and then later sell it.
“It’s a big problem if a child doesn’t want a certain home,” Ms. Johnson says. “[Parents] have to ensure that [their children] have skin in the game – and a say in the process.”
If the parents are taking out a mortgage out to purchase the home, the children should also be involved in the agreement, says Scott Evans, an adviser at BlueShore Financial in Vancouver.
“I like the process of kids approaching the lender, finding out how much they can afford before approaching the bank of mom and dad,” Mr. Evans says.
If parents want to retain control of the property, Mr. Evans recommends they put their name on the title, especially if they plan to sell it down the road.
Parents also need to take steps to protect their investment if the child is married and gets divorced, or if they want to sell the property.
“There are several ways a parent can protect the monies provided to a child for the purchase of a home, including taking back a mortgage that might later be forgiven and various trust arrangements,” says Janet Sim, a partner in the trusts and estates group at WeirFoulds LLP in Toronto. Ms. Sim recommends consulting a lawyer knowledgeable in estate-planning matters to discuss the different options.
Ms. Johnson says the contracts can protect the parents’ investment by stating that, if the home is sold, they will receive their down payment back, with 5-per-cent interest, for example.
“Make it a business partnership rather than a handout,” Ms. Johnson says.
Failing to involve children in home-buying – and the responsibilities of home ownership – can lead to children underappreciating the value of what they been given.
“They don’t realize the value of what they’re receiving,” Ms. Johnson says.
Mr. Paul says his parents would have been reluctant to support his home-ownership dreams had he not shown financial savvy, including his ability to save for the initial condo purchase. His long-term goal is to own multiple investment properties.
“They saw what I was trying to accomplish,” Mr. Paul says.