4 Ways to Assist Your Adult Child Buy Charlotte Real Estate
Many seasoned homeowners fully understand the major benefits to homeownership and just cringe as they witness their young adult children renting apartments, condos or single family homes in Charlotte. Like most, they feel that their child’s rent money is being thrown right down the drain.
Yes, most home values have fallen over the past 3-4 years but, considering the luxuries of homeownership such as pride, tax benefits, stability and the freedom to make additions, remodel and even paint as you wish, buying a home is the preferred way to manage your housing finances. There may not always be a financial gain with a home purchase but, there is NEVER a financial gain to a tenant–other than that of the owner, whose mortgage is being paid by the tenant!
Recently assisting one of my buyers to purchase a Charlotte home for their young adult child, together we explored the options that are available to parents assisting their adult children’s home purchase. Of course, you can lend money to your child to help him or her buy Charlotte real estate but, let’s explore some other financial options to determine which is the most advantageous for you and your child.
Other than lending money outright, here are four additional ways to help your child buy Charlotte real estate:
1. Give the down payment as a gift.
Before deciding whether to make the money a gift or a loan, consider what moral message you may be sending. You don’t want your child to develop a sense of entitlement and take for granted that he or she can come to you any time money is needed.
If you decide you do want to give part or all of the down payment as a gift, consult with your CPA or financial adviser to determine the amount you can give away without incurring tax liabilities.
2. Co-sign the mortgage.
This could be all the help your child needs to get a mortgage. It may make sense if he or she is close to graduating from college and already has a job lined up or has solid but, irregular income that would disqualify her or him from getting loan approval such as a commission-based job.
Keep in mind that there are big risks associated with co-signing a loan. You’re responsible for the home note if your child fails to keep up the payments, which means the bank will come after you for the money. If your child is late with a payment, it also impacts your credit score. If you ever do seek another loan for a home or another large expenditure, you may find the co-signed loan is prohibitive to your borrowing ability.
Before co-signing a loan, always seek legal and financial advice. If your child is also married, you will also want to ascertain that his or her spouse signs the loan and any other written documents that cover the terms of your agreement.
3. Set up a shared-equity arrangement.
Everything is open to negotiation in a shared-equity arrangement. Typically, a written contract spells out that the child (as the homeowner) is responsible for mortgage payments and also receives the tax deduction that comes along with it, and you (as the investor) are responsible for providing the down payment.
Three conditions which you’ll want to agree on before finalizing the agreement are:
a. Who pays the property taxes?
b. Whether or not your name will be on the loan.
c. When will the investment be paid back to you, through either selling or refinancing the Charlotte real estate?
Due to the inherent flexibility in this type of arrangement, it’s crucial to involve your attorney and have a document drawn up that spells out everything in great detail.
4. Institute a lease-to-own agreement.
Simply stated, you buy the property as an investment property and rent it to your child. You can set the terms of the agreement, but here’s how lease-to-own arrangements typically work:
- The adult child renter is buying the right to purchase the house later at a given price. There’s often an upfront option fee of 1% to 3% of the home’s purchase price involved. The option fee can also be added to the monthly rent if it is not available up front. Generally, some or all of the option fee is credited as a down payment on the purchase of the house.
- During the rental period, the parent still owns the home and are legally responsible for it, but the child maintains the property as his or her own. Be sure to have an attorney-drafted, legally-reviewed contract signed by all parties involved.
If you’re interested in purchasing Charlotte real estate for your adult child or as an investment, I can help. Give me a call today or email me at Debe@DebeMaxwell.com for more information.