The housing crisis is among the most pressing issues young Canadians face today. Low supply and intense competition mean breaking into the real estate market has become more challenging than ever. It’s not surprising when you realize that the prices of houses have skyrocketed over the past few years. At last glance, the average cost for a freehold property in Ottawa was $708,968. That’s down from its peak price in February 2022 but still beyond the reach of many young people who are just carving out their paths.
Unfortunately, the average income has not kept up with the rising costs. And even with dual incomes, many in the younger generations face an uphill battle. Add rising interest rates to the already high housing values, and it’s no wonder that so many younger people have resigned themselves to a life of renting – unless they get a much-needed boost from a family member.
If you’re considering helping your child buy their first house, you’re not alone. A poll commissioned by the Ontario Real Estate Association found that more than 40% of young homebuyers who have successfully purchased a home did so with help from their parents. In this post, we’ll explore the benefits and risks of helping your child get into the real estate market.
The Pros and Cons of Buying Property for Someone Else
Any assistance you can provide now will go a long way to providing a secure future for your child. However, you should never jeopardize your own financial health or independence. If you’re nearing retirement age, you’ll want to think carefully before making a large purchase. However, there are many good reasons to consider investing in real estate:
- It’s one of the best ways to build generational wealth.
- You’re helping your child build equity as the house grows in value.
- You could rent out the house, or a portion of the house, to help cover the carrying costs.
- You can keep the house in the family or sell it later at a profit.
There’s no doubt that helping your children buy a home gives them a solid start in their adult lives. Before you take your kids out on a house-hunting venture, there are also some risks to consider.
- You will need a significant amount of money for a down payment. This could be anywhere from 5 to 20%, depending on the price of the home.
- If you take a home equity loan to purchase a new property, you must be able to carry the cost of two mortgages.
- Though real estate values always tend to rise in the long term, they could fluctuate temporarily and lose value in the short term.
If you want to help your child into their first home, be sure you are ready to commit to the investment for the long haul.
Looking for the right house to buy? The following will help:
The Benefits of Buying an Income Property
An income property is a home you buy for the purpose of renting it out rather than occupying it yourself. If your children are still young and living with you, this is a superb long-term strategy that can set them up for success for years to come! How does it work?
- You purchase a property now at today’s prices. Since the market is temporarily down, it’s a great time to start looking!
- Instead of moving into the home, you find a tenant to rent it out.
- When your children are ready to flee the nest, there’s a home ready and waiting for them! They never have to worry about being stuck in the rental market.
The advantage of buying an investment property is simple. Your monthly rental income allows you to carry the home at little to no cost or even at a profit. This ability to generate income lowers your risk substantially and reduces the financial strain of helping your child.
What happens if your children are already old enough to venture out on their own? You can still purchase the property as an investment. However, instead of searching high and low for someone to rent it, you’ve already got a tenant lined up and waiting!
Renting the home to your child is an excellent way for them to learn how to budget and manage their money when living independently. However, unlike throwing money away in the rental market, each payment reduces the mortgage on the house.
The smaller the mortgage gets, the more equity they build. Your child’s net worth increases even more when the home appreciates in value. For many people, an investment property is a win-win situation all the way around.
What Are the Risks?
Do you know the number one objection people have against buying an investment property? It’s that they don’t want to be landlords. They don’t want to deal with tenant disputes or property damage. They don’t want the hassle of chasing down rent if a tenant is slow to pay.
Things are different when it’s your own child, especially when they know the property will come to them later on. They will be far more inspired to take care of the home. Instead of the usual landlord/tenant relationship, you will feel like partners.
However, there are tax implications and legalities to be aware of. Whose name should go on the title? And what happens when you decide to transfer ownership of the home?
If you ever decide to sell or gift your child the property, you could be looking at some hefty land transfer taxes and capital gains.
Your primary residence is exempt from this tax, but all bets are off when you add a second property to your name. When selling a home that is not your primary residence, 50% of the profit is subjected to capital gains. Here is an illustration of how it works.
Imagine you buy a property today for $700,000 for your child to rent for four years while attending university. Once they are finished school, you decide to gift the home to them entirely. But there’s just one problem.
The market value of the house is now $800,000, giving you a gain of $100,000. 50% of that amount is taxable, which means adding $50,000 to your income at tax time.
Please understand that this example is for your information only. We are real estate agents, not tax experts. A good lawyer and accountant are essential when buying an investment home for a family member.
Is there any other help for buyers in Ottawa? Check out the following posts for more resources:
- Strategies to Help First-Time Buyers Enter the Real Estate Market
- Why Now is a Good Time for Buyers in Ottawa
- Does Real Estate Protect You Against Inflation?
Other Ways to Help Your Child
As much as you love your child, sometimes buying them a home or investment property simply isn’t possible. Your financial well-being is also important, and you don’t have to struggle yourself to help your child succeed. You can help them get into their first home in other ways.
- You can help them qualify for a mortgage by becoming a co-signing. Your name will go on the title to protect your financial interests.
- One of the most significant barriers to homeownership is the down payment. Paying all or part of the money required upfront can help get your child into the market sooner rather than later.
- Helping with closing costs can also remove part of the burden, especially the land transfer taxes. Nearly every other expense can be rolled into the mortgage, but these fees must be paid in cash.
Some of the best ways to help don’t involve money at all. You can be a sounding board for their concerns and frustrations and a trusted guide along the way.
Your practical assistance will also be invaluable. You can help with the packing and the moving on closing day. Whatever help you can provide, you can rest assured that your child is on the path to a bright future.