With the mortgage bubble now a decade in the rear-view mirror and lending standards tightened, real estate has returned to its historic place as a solid choice for building wealth.
However, the younger generation is encountering two major obstacles in the quest to become homeowners: too much debt and too little income. The average student loan burden for the class of 2016 was $37,172. And because of changes in the job market, plus the lingering effects of the recession, millennials are earning about 20 percent less than boomers were at their age, after inflation.
Due to those factors, a 2015 poll from mortgage lender loanDepot LLC found that three out of four young adults needed their parents’ financial help with a home purchase.
So, let’s say your kids finally are ready to settle down. How can you decide whether to help them do it?
Don’t spend more than you can afford to lose
This is the No. 1 rule when giving money to family. Jeff Holzmann, managing director of iintoo, a real estate investment platform, advises parents to be honest with their children and let them know if they can’t afford to help out.
Borrowing against the cost of your own home, or worse, raiding your own retirement funds, is not advisable, he says. “How are you helping them by taking a greater risk than you can afford to lose? You’re burdening them.”
Have an exit strategy
Mobility is the name of the game in today’s workforce. Your adult child may find a new opportunity in a different city in the next five to 10 years, so both of you need to wrap your head around possible exit strategies.
If the property is rented out, who will assume the management costs? If the rental opportunities are low in this location, what will you do? Will you sell if they vacate? And what happens to the proceeds? What if the property loses value?
Put everything in writing
It can be difficult to talk business with family. To avoid confusion, write down the details of what you are doing and who is responsible for what. Are you purchasing a property on your child’s behalf? Making a loan or gifting money for a down payment? If the former, might the loan be forgiven and does the child have a path to owning the property?
Holzmann suggests that just as you want to protect your own assets, you want to protect your child if at all possible from getting in over his or her head.
“You want them to participate, but you want to control the outcome so it will be a learning experience, not a disaster,” he says. “It’s just like when they were learning to drive, and you might have given them the opportunity to dent the car, but not total it.”
Consider the tax and mortgage implications
Down payment gifts are relatively common. However, they can affect someone’s ability to qualify for a mortgage. It may be necessary to provide documentation that the money is, in fact, a no-strings-attached gift, and in some cases, the mortgage lender wants to see the giver’s bank statement to confirm that the he or she can afford it.
The givers also have to think about their own taxes. The gift tax exemption is $30,000 in 2018 for a married couple filing jointly. It’s also possible for parents to give that amount to a child and his or her spouse, for a total of $60,000 tax free.
It’s their home, not yours
This is less personal finance than psychology. It can lead to friction when parents assume jurisdiction over their adult children’s home. I have had friends whose parents treated their apartment as a pied-a-terre, showing up for long visits, or weighed in on remodeling decisions — or, in one case, scrubbed down the bathroom with a toothbrush.
Decide in advance what the boundaries are going to be, and stick to it.
Anya Kamenetz’ most recent book is “The Art of Screen Time: How Your Family Can Balance Digital Media and Real Life.” She welcomes your questions at firstname.lastname@example.org.