Investing in You: When parents buy property for their kids
Erin E. Arvedlund, Inquirer Staff Writer
Would you buy your college-aged or adult child a house? It's a growing trend, particularly as the real estate market rebounds.
Broker Eric Rehling with Re/Max in Conshohocken says real estate may feel more stable as an investment than the capital markets.
"The parents that have the means to do this are nervous the stock market is a bit overvalued, or they have a decent amount of cash in their accounts because of the run-up," Rehling says.
Depending on their age and tax bracket, some parents approaching 70½ are required to start withdrawing money from retirement funds. "Real estate is a place to invest or 'store cash,' in the minds of the parents," Rehling says.
We queried parents who have purchased property for their children, and they report experiences ranging from neutral to positive.
Bob Rose, an optometrist, and his wife bought a condominium in foreclosure at Academy House in 2011, near the bottom of the real estate market. Initially, they thought the residence would be a perfect retirement place, after they relocate from Westchester, N.Y.
Instead, they renovated the condo, and their daughter and son-in-law moved in - and paid the condo and other fees.
Rather than buying property outright, some parents can fund a down payment.
Last year, 27 percent of those purchasing a home for the first time received a cash gift from relatives or friends to come up with a down payment, according to data from the National Association of Realtors. That's up from 24 percent in 2012.
You can give $14,000 tax-free to any individual each year, so if two parents each give their offspring and their offspring's spouse the maximum, they can give a total of $56,000 tax-free, according to Bankrate.com.
Parental owners often have their kids pay rent.
"The parents can then sell the home to the kids when they are ready, keep it as an investment property, or sell it to someone else," says broker Jody Dimitruk of Berkshire Hathaway in center city.
Parents can also structure a rent-to-own arrangement - with the parents giving rent credit toward the purchase - provided everything is in writing and through an attorney. When children exercise their option to buy, they get their own loan to pay off the parents.
Buy in a college town, for instance, and your child can live there at a reduced rent. But it's important they prepare a lease that parents of any student roommates must sign.
"This is the usual procedure," says Doylestown-based broker Flo Smerconish. "Students do not sign the lease, as they usually cannot afford to pay the rent."
If buying in a university town, expect to own for four years or more. "Then you can either sell it - or not, and keep renting it out - depending on the value," Smerconish adds.
Not always a win
Not everyone makes money buying property for children - even if they own for a long time.
Voorhees resident Lauren Schwartz, a nursery schoolteacher, and her husband Allan bought a condo in Society Hill Towers in 2003 when their children were teenagers.
"We bought it as an investment in Center City," and their daughter ended up living there after college, Lauren Schwartz said.
Last year, they sold the condo for about what they paid. "Money-wise it wasn't that great. We got our money back, but had to pay the taxes and condo fees every year for 10 years," she said.
Their daughter's boyfriend lives in Society Hill as well - and his parents also own his apartment. He and his sister live there, and rent from the parents.
Given the financial wash, would she recommend the idea?
"I would. Kids get out of college, they can't afford much."
Can parents afford it?
Richard Massaux, managing director of investments at Wells Fargo in Philadelphia, urges parents not to buy real estate for children if it hurts their savings.
"There's no blueprint for everyone. Like a car, buying or leasing a home suits different people," he said.
Some parents spent their entire nest egg on their kids, whether to go to college or to buy them a house. "I beg them not to . . . it's a mistake people make, they forget to focus on themselves, just for the short-term satisfaction they think their kids need."
Legally, real estate lawyers recommend purchasing a home in your own name - not in the child's name. If kids stop making mortgage payments, that can hurt the parent's credit rating.
Bob Rose, the optometrist, said his wife grew up in the Northeast and yearned to move back to the city. "You can't take the Philadelphia out of the girl. She's always wanted to come back."
After looking for a few years, they found the Academy House foreclosure with a great view - and purchased it in their own name.
"It was a scary time, but a good time to buy. We renovated and my daughter and son-in-law moved in. It was a win-win situation. We'll eventually move to Philly - even though my kids don't want to leave the apartment. They got a great deal," Rose said.
In three years, the market price of the unit has increased, but they have no plans to sell. That said, Bob isn't allowed to just drop in. "I have to ask permission to visit my own house! My daughter learned how to negotiate - from me," he said.
Would Rose recommend that others buy homes for their kids?
Yes, but "you have to have the right kids, meaning, my daughter and son-in-law are amazing people. My kids are smart and grateful. They totally appreciate what we've done for them."