An Equity Sharing Arrangement Might Be The Answer . . .
Parents helping their children invest in their first home is certainly not a new idea. We see a variety of choices being made in the marketplace. Some elect to co-sign on the mortgage with the children. It doesn’t cost Mom and Dad any money, but it may help the children qualify for a loan. Others either give or lend money for the down payment. A few even decide to put enough money to “buy down” the mortgage interest rate, allowing for the rate to be lower in the first few years, making it easier to qualify for the loan by lowering the monthly payment.
The concept of equity sharing, although used by builders and real estate investors, may also be one of the best methods for helping the kids buy a house. Shared equity allows the children to feel less indebted than with an outright loan, and at the same time gives parents an added tax advantage.
An equity sharing arrangement might work like this: The young homebuyers purchase a home jointly with their parents, they split the down payment and ownership costs including monthly payments, and the children rent the parent’s share of the home. The benefits to the young homebuyers include affording a larger home for less money, having lower down payment and ownership costs, ease of qualifying for the loan, and the beginning of building an investment portfolio. The benefits to the parents include helping the children to afford a home, receipt of rental income, financial and tax benefits, increasing their investment portfolio, and having a reliable tenant.
When the home is sold, perhaps after a specified period of time, the parents get back their initial investment, and the additional proceeds are shared in proportion to each one’s investment.
While shared equity can be arranged between perfect strangers, the beauty of this agreement is seeing a family investing wisely together, with both parents and their children gaining benefits they may not otherwise obtain alone.
Both parties should exercise due diligence by receiving counsel from experts in the areas of accounting, financial planning, and legal.