Buying a home for your kids and helping your children out with a home purchase is a noble cause with pitfalls and can affect your retirement.
Q: Our daughter and son in law have been renting a house for about a dozen years. Our daughter has medical problems and has been out of work, and our son in law works in the building trades.
My husband and I can qualify to purchase a home for them and would require them to pay us rent to cover most of the housing expenses and repayment of down payment, plus small amount to save for maintenance.
Is there any advice you can give us with this plan? We can qualify to obtain a mortgage with 20 percent down. We’re looking for a foreclosure or short sale home but it seems every foreclosure we find already has a contract.
We assist them monthly with some cash and feel that our money is going to their landlord and that we might be better helping them purchase a home rather than renting. My husband has been retired for about 10 years and I will probably retire in two years.
A: It’s noble of you to help out your daughter and son-in-law and to understand that you may need to help them out for some time to come. However, you should also think about your retirement and the general housing market before buying a home for them.
You’re not alone in thinking that renting a home is like throwing money at a landlord. But in some cases, you might be better off renting than owning. You should sit down with your husband and walk through your issues first, then consider your daughter’s issues.
As you approach retirement, you need to consider your need for money and using your savings during those retirement years. If you have sufficient assets to live comfortably in retirement and have money to spare to assist your daughter, you might then consider helping them out over the long term.
If you determine that money would be tight if you had to carry the costs of owning another home or even contributing to part of the expenses of that other home, you should consider that the rental option might be best for your daughter and son-in-law until their finances improve and they can afford their own home.
It must be difficult for you to deal with your daughter’s medical issues and recent economic conditions have probably made it quite difficult on your son-in-law as well as the construction industry has not done so well lately.
Since you seem to think buying a home would help, you have to consider whether they have enough savings or cash flow to afford the housing payments, taxes, insurance and upkeep for the home you might have in mind.
Given their financial situation renting a home might be the best situation for them. If the rental costs are less than what it would cost them to own a home, they might a better financial future in the rental home than paying the higher expenses of owning a home.
In addition, you certainly would want to talk to both of them to make sure they would be comfortable owing you money for the home. Given the uncertainty in the market, you’d also need to consider what would happen if your son-in-law were to lose his job, and if he were to have to move to find a job in a different city.
While they may not be building any equity while renting a home, their living expenses might be at a level at which they feel more comfortable. If while renting you or they can save some money, that money can come in handy in the future.
As you look at foreclosures or short sale homes in your area, you may actually find one to buy. But before you do, make sure you understand the expenses of owning that other home. You would want to make sure that those expenses are much lower than what your daughter and son-in-law currently pay. If the foreclosure or short sale home prices are well below what other homes might sell for in the neighborhood, you might find a good home at a good price.
At that lower price, you might get some appreciation and built in equity for the home. That is the home value shortly after purchase might be higher than what you paid for it and if you had to sell within a couple of years, you might not lose any money, but might actually make a bit.
If they monthly housing payments on the home purchase are about the same or higher than the rental home, you’ll have to factor in the costs of the move as well as the other costs that go into buying a home and then you’d also need to consider the probability that they would live in the home at least five to seven years. If they don’t end up living there that long, you could end up losing money on the home when you include the selling costs and the real estate broker fees later on.
Finally, as you look over all of the information you have for comparing whether they should buy or continue to rent, you can set the maximum price that you’re willing to spend for a home. You’ve already found out that at your price range, home investors or other home buyers are snatching up those foreclosed homes or short sale properties.
If after considering all of these issues you still decide to buy a home, you’ll have to have some patience. Since you are in no rush, it seems that there is plenty of inventory in many housing markets to satisfy home buyers down the line.