When helping your children buy property and get started with home ownershipOwnership is the absolute right to use, enjoy, and dispose of property. You own it!, it is important to decide whether you are gifting the property or entering a joint real estateReal Estate is land and anything permanently attached to it, such as buildings and improvements. investment.
Q: I live in the Atlanta area. I have three older kids in their early twenties and I’m considering purchasing a small and relatively inexpensive piece of real estate for them to get them started with home ownership.
The reason I’m thinking about this is the abundance of inventory and availability of homes, the extremely low interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. rates, and the low price points for homes.
But I have some concerns. On one of your recent radio shows, you explained why you believe another recession may probably occur and that we should prepare ourselves for it. The next issue I have is finding a reputable buying agentAn Agent is an individual who acts on behalf of a consumer. A real estate agent represents a buyer or a seller in the purchase or sale of a home. Licensed by the state, a real estate agent must work for a broker or a brokerage firm. An insurance agent helps a consumer purchase an insurance policy. Insurance agents are also licensed by the state. to work with the banks that have foreclosed properties and know short sales. Finally, what will be the best way to take titleTitle refers to the ownership of a particular piece of property. to the property since my kids can’t obtain financing on their own?
A: First, thanks for listening to the radio show. We’re glad you’re enjoying it and thinking about investments you can make with and for your children.
We do believe we could be heading toward another recession. We might be able to avoid it, but we seem to be leaning that way. And even if we don’t have an official recession, much of the country doesn’t feel as though it ever got out of the last recession, so we may instead see years of slow economic growth.
As your kids are in their twenties and are getting started, you are generous in working with them to participate in the gift of and investment real estate. You need to decide if your help will be in the form of a gift or in the form of a joint investment with them.
This is important: You truly need to differentiate these concepts. If you are giving them a gift, then your children’s expectations will be that they might have absolute control over the investment and you will not share in the upside potential with these properties.
If you are investing with them, then you need to outline the investment plan and you both should know exactly who will make investment decisions and how profits and losses from the investment will be shared.
These choices are important to make (and put in writing) to keep everybody aware of how the investment will work. You don’t want to get yourself into a situation where you feel you are investing with your kids and your kids feel that you gave them a gift. In a gift situation, your kids may make an investment decision that you might not like.
Given these circumstances, if you invest with your kids, make sure you set up a partnership type document that describes what duties and responsibilities you each will have and how profits and losses will be allocated. You will also need to decide how major decisions will be made regarding the property and who will have the ultimate authority to make decisions.
If you still want to proceed with them to do the investing, you need to make sure you find the right investment. Georgia is one of the states that has been hurt hard during the great recession. Now could be a good time to buy in certain areas. Some real estate prices have stabilized and you’d want to find a real estate investment that you and each of your sons could handle easily. The property should be nearby and you and your sons should be willing to put some time and effort into managing and improving the properties.
As we have said, we might be heading into tough economic times in the near future, but you should be buying real estate for the long term. If you plan to flip the property for a quick buck, you might want to consider a different type of investment.
You should look for a property that needs some work, in a neighborhood that is quite stable, and where renters are looking to rent. It’s fine to think you will make money by buying a distressed property in an area of town hard hit by the recession, but if you buy it, you need a way to make money off the property. If you buy it, put money into it but can’t rent or sell it, your investment decision will have been a poor one.
In some hard hit areas of the country, we’ve seen real estate prices rise from the bottom. As buyers have returned to the real estate market, these buyers have been looking for homes in some of these areas. As more buyers have purchased homes in these improving housing markets, fewer homes are available and these markets have better prospects for investors and homeowners for the future.
Keep in mind that buying a foreclosed home in a recently built subdivisionA Subdivision is the division of a large piece of property into several smaller pieces. Usually a developer or a group of developers will build single family or duplex homes of a similar design and cost within one subdivision. in Las Vegas will be quite different than buying a home in greater Atlanta. More people might want to move into a recently built subdivision to live in a home that is 3 or 4 years old, than buy a home in an urban area that might still have a large number of homeowners that are facing foreclosureForeclosure is the legal action taken to extinguish a home owner's right and interest in a property, so that the property can be sold in a foreclosure sale to satisfy a debt. or are underwater in their homes.
Since we say in real estate that locationLocation is where a property is geographically situated. "Location, location, location" is a broker's maxim that states that where the property is located is its most important feature, because you can change everything about a house, except its location., location, location is most important, please keep that in mind while you search for real estate with your kids. A good real estate brokerA Real Estate Broker is an individual who is licensed by the state to act as an agent on behalf of the seller or buyer. For his or her services, the broker receives a commission, which is usually expressed as a percentage of the sales price of a home. can help you navigate the rough waters of investing in and around Atlanta. You can ask around and see what names pop up in your search. Ask friends, neighbors and any real estate professionals you have come across over the years.
You’ll need to research not only the real estate agentA Real Estate Agent is an individual licensed by the state, who acts on behalf of the seller or buyer. For his or her services, the agent receives a commission, which is usually expressed as a percentage of the sales price of a home and is split with his or her real estate firm. A real estate agent must either be a real estate broker or work for one., but you should keep in mind that some real estate agents are better in some neighborhoods than others. You wouldn’t want a great real estate agent without any familiarity with the area you want to invest in to help you out.
You need the best real estate agent for your needs for the area you are looking at. While you seek out a real estate agent, that agent should have a personality that works well with your personality. The agent should have extensive knowledge of the homes and neighborhoods you are targeting. The agent needs to have worked on a fair number of distressed properties in the past to understand the process you will go through should you decide to buy a short sale home or a home sold through the distressed home sale market.
Finally, if you plan to invest with your kids, you might want to take title of the homes with your kids. If you have a financial estate that you are looking to protect and you have a financial planner, you might want to talk to him or her to see what your choices might be and which one fits your needs. Some investors elect to hold title in the name of a corporation or company, but the disadvantage with that form of ownership is that you will only be able to finance your purchases through lenders that will allow you to hold title that way.
Even though you intend on making these purchases for your investment purposes, there might be a chance that your kids might want to live in some of these properties. In this situation, you and your kids might be better off holding title in your own names.
You should discuss this topic further with a real estate attorneyA Real Estate Attorney is an attorney who specializes in the purchase and sale of real estate. once you decide the manner of in which you plan to invest with your kids and what you might decide in how you’d want to hold title to the properties. In any case, make sure you have a good umbrella insurance policy with a high limit of coverage to cover you and these properties. No matter how you hold title, insurance will be key to protecting you from possible issues that can come up when you invest in real estate.