Today, I want to talk to the parents of 20 somethings. I'm gonna give you my best case scenario on why you should help your kids buy their first home.
To the parents of 20 and 30 somethings…
…that haven't bought their first home yet. And if you don't fall into one of those categories, well stay tuned anyways - you're gonna be the ones that share this with your parents. I don't think it will take me too long to build my case.
I think that parents should provide their kids with the down payment for their first home.
How you choose to do this is totally up to you. You can gift it to them, you can loan it to them. Whichever way is completely up to you. The point is, that you get them a down payment.
Here in Canada, it's required that we have a minimum of 5% down when you purchase a property. And here in London, the average home value is around $530,000 here at the end of 2020. Now that's probably a bit aggressive for a first-time home, so let's use a value of $350,000. A 5% down payment on a $350,000 home would be $17,500 but let's round that up to $20,000 (you'll help them with some closing costs as well) and that should cover them and allow them to buy that first home for $350,000.
Assuming that your child is gainfully employed, don't have massive levels of debt and have a somewhat reputable credit score, then there shouldn't be an issue for them to get a mortgage on a property like that.
Increasing Home Values Will Help You
Over the past four years here in London I mean homes have gone up significantly well over 10% per year, but that's not typical. In a typical year we would see more like three to 5% appreciation. So let's say your child bought that home for $350,000 here in 2020, and for the next few years we see 5% appreciation on that property. By the end of the second year that home is going to be worth $385,000. They could then take that equity that they've built into that home, pull it out and pay you back on that loan.
While this is an overly simplified analogy of how to get your kids into real estate…
…I think it proves the point that getting them in sooner rather than later can be beneficial. And there's not all that much risk to it. I believe that real estate is the average Canadian's greatest wealth builder. In fact, as the equity grows in their property a lot of times they leave it untouched. And when it comes time for retirement, selling their home is one of the biggest contributors to their retirement funds, so the sooner they get into owning their own home whether it's in their 20s or 30s is better.
The person who buy their home in their 20s is significantly further ahead than the one that buys their home in their 30s. While there's a lot of nuances to this conversation and I wanted to keep it very simple, I think that there's a lot to be taken away from this conversation, especially as we look at the demographics that we see nowadays. With boomers holding a large amount of wealth that they will eventually pass along to younger generations, I say, why not do it sooner? Why not give them the opportunity to get into home ownership, pass that money along to the 20 something or 30 something that needs a leg up, especially as the younger generations get buried by more and more debt.
I think it's a really, really simple way for parents to give their kids a leg up with very, very limited risk. If you're a parent and have more questions then feel free to get in touch. If you're a 20 or 30 something looking to buy your first home, then send this along to your parents. That's it for me, send me a message by clicking the button down below with any questions that you have and I'll be happy to answer them in a future post.