Assisting Children Into Property
In the first of this three-part series on assisting your offspring into their first home/investment property, Mark Withers outlines the crucial factors you should consider before going to the bank.
1 March 2016
With rising houyse prices comes pressure on parents to assist their adult children onto the property ladder, but this seemingly generous act can be fraught with issues. Legal, tax, financial, and scariest of all - family relations.
So what are some of the things to confront and what are some of the dos and don’ts of helping family members into a property?
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. Even though a successful independent child may not express concern at assistance provided to a less financially independent sibling, they 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 kids is a conversation that should generally be out in the open. Ideally have it in an environment where everyone can table and express views freely. It sometimes helps to have this conversation formally, with a chairperson 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 remortgage 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 child’s history of repaying loans to you - if there is a history of excuses and underperformance you can assume you will continue to experience the same thing.
The bottom line is you should generally not provide assistance you can’t afford to lose, for example, assume the funds are never returned and set the benchmark accordingly. Don’t worry if the assistance you feel you can 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 the pressure 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.
Here at Withers Tsang we are experienced at listening to you and trying to understand your family dynamic. We can help you with designing and implementing a system to assist you to help your children - one that is balanced and appropriate.
Please don’t hesitate to give us a call if this is a dilemna you are wrestling with. We are willing and able to assist.