Discover three ways to use real estate as leverage for your children’s future
5 ways to give your children a major financial
boost and help them become homeowners
In their lifetime, Baby Boomers and Gen Xers experienced a significant increase in their standard of living. For them, home ownership came relatively easy, and the economy flourished in many ways. Today’s young adults, however, are facing real financial challenges when it comes to home ownership, even with many excellent opportunities at their fingertips. Property prices have soared as a result of the recent pandemic years and buying a property can be increasingly daunting for first-time buyers. Parents looking to help their children financially are also feeling the crunch.
Our experts have noted that, although parents are often financially literate, they are not always fully aware of all the ways in which they can give their children a solid financial start. But the options are plentiful: “When our clients talk to us about what they want to leave their children, financial prosperity and stability are at the top of their list. They want to give them the freedom that comes with a flourishing financial situation. Owning real estate, which has been a safe investment for hundreds of years, and doing so at a young age is a powerful way of achieving this. Parents can help their child achieve this through various other means, some of which are not so well known,” says Félix Giguère, partner and residential real estate broker at BARNES Québec.
A snowball effect
Whether you call it a snowball or a butterfly effect, the impact it generates is significant and exponential. A downpayment gift, commonly referred to as “love money”, or any other financial action that lets your child become a homeowner builds a stepping stone that your child can then leverage to create financial wealth. Saving enough money to take their first step on the home ownership ladder has always been the most difficult threshold to cross, and never more so than now. The earlier you set the groundwork for this in your child’s life, the greater and more interesting the opportunities to grow their property assets become. Bequeathing part of your planned inheritance early in life, at a stage of life when needs are greater and impacts will be most felt, is a truly enormous gift.
Even a small amount can have a big impact:
- in the short term, by enabling your child to enter the property market.
- in the medium term, by helping them save and invest their long-term savings via their mortgage.
- in the long term, by allowing them to have a property that increases in value and the ability to refinance, which is the very definition of real estate leverage.
Give your children the gift of a financial education
What’s more, by giving your child the gift of home ownership at a young age, you’re giving them a real-life, hands-on financial education that will come in handy throughout their life. Taking responsibility, investing for the future, dealing with various institutions, and developing a taste for creating their own wealth are formative skills to possess that can help motivate them to keep going. Whether they spark an interest in real estate investing, an important tool for creating value, or simply install in them good personal finance management habits, it is a gift that will pay dividends for a long time.
“Investing in real estate introduces the concept of saving money into your child’s lifestyle, makes it much more concrete for them, and grows their money significantly over time. It’s an excellent way to get your child on the road to financial health and even prosperity,” explains Félix Giguère, partner and residential real estate broker at BARNES Québec.
5 ways to create family leverage
Here are five options to consider before you even start to discuss and evaluate the best options for your family:
1- Cash gifts for downpayments
Although such “gifts from above” are a rare thing in life, cash gifts happen more frequently in wealthy families. They truly are the definition of generosity. With a rising cost of living, your child’s ability to save for and build a sizable downpayment is undeniably hampered. Consequently, cash gifts, no matter how small, will allow your child to get the ball rolling, acquire a first property more quickly and start working earlier on an interesting project with financial leverage. Let’s be clear: cash gifts do not have to be huge sums. They may only represent a percentage of a downpayment or they may cover all of it for a very small entry-level unit, which will, over time, create value. Consider Florence’s case, who made brilliant use of her parents’ gift and is now, before even turning 30, in an enviable financial position.
2- Family loans
The general idea is to help your child get the funds they need to make their first purchase. Whether offered as a gift or a loan, the short-term effect will be the same. Parents must agree with their child on loan terms and a repayment plan, often at a favourable interest rate that matches the profit that the parents could have made from a standard low-risk or even interest-free investment. Such a deal eases the financial burden on the child, compared to a bank loan and, in the event of an exceptional situation, allow s for negotiating a grace period in payments. We recommend writing and signing a formal agreement, both to make it legally official and to instill the sense of commitment you wish in your child.
3- Co-signing a mortgage
This option allows a child to get approved for a loan from the bank that their record, on their own, would not allow. Moreover, they will benefit from favourable interest rates and repayment terms, with parents having lent their good standing and credit record to provide the financial institution with additional assurances. At the same time, parents are helping their child build their good credit record. It is important to note that parents are responsible for repaying any loan for which they have co-signed. It, therefore, goes without saying that such an option should be entered into confidently that your child is mature enough for such a commitment.
4- Joint purchases
Buying a property together can be advantageous for both parties. Your child can enter the property market and you can increase your property assets. This can be a win-win situation, but it must first be carefully evaluated. Parents who often already own one or more properties will get a less favourable tax treatment on resale, which would lower potential profits. Nonetheless, it might still be a perfectly acceptable business arrangement for you if you are willing to make that small sacrifice for the good of your child. Such as setup is well suited to first purchases, and your child would then become the sole owner of their second property, when the time comes.
Refinancing is one of real estate’s most important concepts. After paying into a mortgage for 4 years, owners can refinance up to 80% of their property’s value which they can then use for another purchase without having to sell their first property. This is the very core principle of financial leverage and one of its most obvious manifestations. Once you start the “snowball effect” for your child, you have also given them the gift of being able to access this valuable asset-building tool over time. It does increase your child’s level of debt, but it also increases their capital, which then increases significantly in value from year to year.
This strategy can also be used by parents. Having often purchased their own property well over four years ago, parents can refinance their property, even once the mortgage has been paid in full, to generate funds for their child. The refinanced mortgage is then put in a family member’s name, who will be responsible for paying it off. Curious about it? Read along for the story of Joyce and Robert who refinanced their Outremont home for their son James.
Where do you start to sort your situation out?
To help bring some clarity, here are 3 key elements to think about from the very start of your project:
- Set your goals: Do you want to give your child a head start? Or do you want them to learn more about property investment?
- Get good advice and support at every step: Discuss your situation and goals with a real estate broker that you trust. BARNES advisors will be able to detail all the options available to you and, above all, point you towards the one that suits you best. Our real estate experts work with financial planners, accountants, tax specialists, lawyers and private banks, and act as a conductor and guide as you navigate a world full of opportunities.
- Assess your financial capacity: Do you know how much you want to and can invest in this project? Your financial planner will be able to walk you through this exercise while your BARNES advisor brings light on the different investment scenarios at your disposal. This can be an excellent starting point.
The new trend of gifting assets during one’s lifetime
“We frequently see this new trend among wealthy clients. Parents choose to leave part of their family assets during their lifetime. They want to see their children enjoy being financially comfortable, share in zen family moments and have a good quality of life,” says Félix Giguère.
Other immediate incentives, such as income tax reduction, may underpin this choice. By bequeathing part of their inheritance during their lifetime, a person can benefit from important tax incentives, such as breaks, reductions, and credits. Since taxation rules are complex, it pays to have a tax expert look over your details. Your BARNES expert will be able to recommend professionals who have the expertise you need to come out on top.
“Love money” advice
Étienne Beaudry has had the chance to come along many families considering this type of gift and those experiences have filled him with a deep sense of joy: “It is absolutely wonderful to feel how proud a parent is as they bequeath part of their carefully earned heritage and to see the joy and ambition that fills the child who receives it.” He does, however, remind families considering such arrangements that great diligence is required. Although the vast majority of deals are based on the affection and love family members have for each, it is always better to draw up clear, official contracts to protect all parties’ interests and to take the transaction as seriously as it deserves. Your advisor will be able to guide you through the process and recommend relevant inclusions. This way, you can use real estate as a great tool for freedom and strengthen the precious family ties that bind you together!
2 success stories
Florence, 29, owns more than $1 million in real estate assets
Since Florence’s parents live out of town, she left the family nest to be closer to her studies. Fully aware of the significant financial losses involved in paying rent for five years as she studies—let’s estimate rent at $1000 per month, for 60 months—her parents instead choose to give her a $30,000 downpayment. With the money, she can buy a small, simple but well-located studio near the city centre. After four years, she decides to refinance her home to pursue her real estate projects. She obtains 80% of the value of her first property as a loan option, and then buys a more expensive condo into which she moves. She rents out her studio, which now pays for itself. Having been bitten by the bug, she repeats the process 4 years later. After only 8 years, Florence, still in her twenties, now owns 3 properties worth just over $1 million. This strategy can be repeated over and over again, creating a level of wealth that would be difficult to otherwise replicate.
Sylvie and Bernard use their family home to create leverage for their son
Joyce and Robert have lived in Outremont for 20 years. Their property, initially purchased for $200,000, now has a market value of $2 million. Their son James wants to purchase a condominium in Griffintown, near his first job. Even though the mortgage on the Outremont house has been paid off for years, Joyce and Robert can refinance their property and obtain a line of credit, using the house as collateral. This line of credit, in the form of a mortgage, is put in James’ name, who is responsible for the monthly payments to the bank. Two huge advantages stand out for James: he has a loan accepted by the bank even though he does not have the required credit file, and he has the downpayment he needs to start investing in real estate. For Joyce and Robert, their financial situation does not change, although they are jointly responsible for the mortgage.
Interested by one of the featured options to help your children build a real estate portfolio? Don’t hesitate to contact BARNES Québec’s experts who will take the time to weigh the pros and cons of each possibility and help you make an informed decision. We want to team up with you for the long run to help you identify the best opportunities for your evolving needs and contribute to your family’s financial prosperity.