Invest in Rental for Child?

[mordecaimcbain]

We live in a MCOL - HCOL area, and housing prices have consistently been on the rise for the past 12 years (we're not in CA, but we seem to be trending in that direction). We have a daughter in middle school, and we'd like her to eventually have the option to own a home in the same metro area where we live now. If prices continue to rise, I don't see how she'll reasonably be able to own a home here unless she enters a very lucrative career (of which there's no guarantee).

Question: should we purchase a home now and operate it as a rental for the next 10-15 years? In some ways, this will protect us and her against a huge increase in home prices, should that occur. In order to secure a rental that breaks even, we'd likely have to spend close to $200K. That's around 1/5 of our net worth, not including our home equity. Is anyone else in a similar situation and concerned about the next generation's ability to own a home? Is that a reasonable hedge, or are we overthinking this?

[mhadden1]

are we overthinking this?

Yes.

[legalwriter1]

So many things can change for a child in middle school. Your daughter may not want to live near you. She may not want to be a homeowner. She might want to get married and pick out her own house. She might want to spend her 20s moving around. Some parents can also be too controlling which can cause marital problems if she gets married.

You can just invest and gift the money to your daughter at some point. I would focus more on 529 accounts and just your taxable brokerage account, or your own tax advantaged accounts depending on your age. You could also put money in a UGMA/UTMA account, depending on your state. In my state, I control funds in a UGMA account until the child turns 21. Another option is setting up a trust and just invest in the market.

We have 4 children. We focus more on 529 and UTMA accounts for our children. Giving them an education is the best gift we can give our children. Our oldest son, age 20, pays for his personal living expenses and his differential tuition.

I find being a landlord a lot of work. Real estate is also not liquid. Historically, the S&P 500 probably does better than most real estate markets. My mom bought a rental in 1993 for $115k. Now 30 years later, it is only worth $350k. If she put that $115k in the S&P 500, reinvesting all dividends, it would be worth around $1.35 million today.

If I get an inheritance, I might gift some money to my children for help with a down payment when it comes time for them to buy a house. For example, if they save $30k (10%) for a $300k starter home, we could match the $30k for them to avoid PMI. I think having some skin in the game rather than gifting a house outright teaches a child more about responsibility and self-reliance.

[neko06]

What if she doesn't want to live in the same town?

[z3r0c00l]

She can rent if she can't afford to buy for a while. Odds are you would do better investing the money and giving it to her later. More flexibility, less work for you.

[Bikesy]

If you're already a real estate investor then yea I think its fine to earmark one for your kid. If you're not, just invest in an index fund and gift to them at a later date for a home purchase.

[Sandtrap]

We live in a MCOL - HCOL area, and housing prices have consistently been on the rise for the past 12 years (we're not in CA, but we seem to be trending in that direction). We have a daughter in middle school, and we'd like her to eventually have the option to own a home in the same metro area where we live now. If prices continue to rise, I don't see how she'll reasonably be able to own a home here unless she enters a very lucrative career (of which there's no guarantee).

Question: should we purchase a home now and operate it as a rental for the next 10-15 years? In some ways, this will protect us and her against a huge increase in home prices, should that occur. In order to secure a rental that breaks even, we'd likely have to spend close to $200K. That's around 1/5 of our net worth, not including our home equity. Is anyone else in a similar situation and concerned about the next generation's ability to own a home? Is that a reasonable hedge, or are we overthinking this?

to op:
**From a purely rational financial Real Estate investing in "residential income property" perspective.
Not a good idea.
Questions to ponder:
0
Is this a condo, apartment, or single family home SFH, or 1/2 of a duplex, etc?
1
If you were not buying this for your daughter, would you do it to diversify your assets and income stream with a goal of having your "rental property business" earn a minimum "net" (after all expenses and mgt fees, taxes, etc) 6-10 percent a month in positive cash flow profit (not including property value appreciation, etc)??
2
Do you have other rental properties?
3
Would you pay cash, 200k, and be able to buy the rental completely or do you have to get a mortgage loan?
3b
If you have a monthly mortgage or equity loan and a tenant does not pay rent for 6 months, do you have enough cash flow from income to cover the rental ownership costs?
4
Will you pay a property management company or "self manage" handling everything including tenant renting, maintenance and repairs, etc??
5
"Secure a rental that breaks even".
Are you commiting to owning a residential income property that "only "breaks even" and has zero ROI (return on investment)??
6
Your daughter "is in middle school".
If you buy the rental unit, then either because of career changes or life and/or family dynamics, you need to relocate to another area, perhaps far away, will you keep the unit or sell it because you want your daughter to live nearby from where you live?
7
Have you realized that your "umbrella" and other liability and other insurances will need to be "on board" in case of; tenant lawsuits, property issues, etc.??
8
A priority of residential income property ownership is having an "exit plan" at all times.
If you did buy a rental for your daughter, would you be able to turn around and sell it in 1 or 2 years and recover your money because you did not overpay for it?
(R/E valuations and appreciation rates are highly location specific, so this varies per person and situation, etc).
9
As suggested upthread, would you consider investing the 200k in your existing portfolio, then "gifting that to your daugher" later in life when she needs it for a down payment or payment towards a residence, after renting for awhile, or otherwise?
And/or adding that provision in your trust (fi you have one) for your daughter's needs?

to op:
I hope this is helpful for you.
to op:
(perspective): I have done this for my children and it worked out well, once. But, I was/is in the R/E ownership/development business (own) and not an "employee", so my financials and situation was very different than most. I have known other R/E business owner parents that have also done this for their children. Sometimes it works out well, especially in Hawaii where most everyone stays put (an island plus island cultural bonding). Or, usually, the children sell the properties for the cash.
j
dis laimer: zillions of ways to things and thinking about things. This is only one.

[TomatoTomahto]

are we overthinking this?

Yes.

I have, probably correctly, been accused of smoothing my kids’ lives too much. This, however, belongs in a Helicopter Parents Hall of Fame.

Kids should rent, not own. Who knows where their education, romance, employment, etc. will take them?

[PeninsulaPerson]

are we overthinking this?

Yes.

I have, probably correctly, been accused of smoothing my kids’ lives too much. This, however, belongs in a Helicopter Parents Hall of Fame.

Kids should rent, not own. Who knows where their education, romance, employment, etc. will take them?

+1

I don't see how she'll reasonably be able to own a home ...

She'll do it - just like everyone else ever has done it.

It always seems expensive. It (almost) always all works out.

Your daughter deserves a chance to struggle. It'll be good for her. Not sure if it builds character but it can build determination and confidence, for sure!

[SpartanBogle]

We did something similar about 10 years ago which coincided with the birth of our son. It's not specifically earmarked for him but it does give us lots of options. He could live in it, continue to rent it, sell it to buy a house in another area. The house could also be a good backup for us if we need to downsize for some reason.

In 10 years the house has more than doubled in value and we are collecting rent along the way. It does come with the landlord headaches, but so far it has been worth it for us. That being said, having cash/investments is good too, but we wanted to diversify and have a housing hedge.

[lthenderson]

So many things can change for a child in middle school. Your daughter may not want to live near you. She may not want to be a homeowner. She might want to get married and pick out her own house. She might want to spend her 20s moving around. Some parents can also be too controlling which can cause marital problems if she gets married.

+1

OP - What if she wants to live closer to her first job than her parents? What if her dream job is somewhere in another state or even country? What if the neighborhood you buy a house in now changes and becomes a non-desirable place to live in 15 years down the road?

There are probably a 1000 different scenarios this could go wrong.

[BrooklynInvest]

It's a good - and well-intentioned - question.

I managed it, my mum managed it. Heck even my grandparents managed it during a depression.

Me, I would never buy a single apartment as an investment - taxes, maintenance, fees etc. are all inefficiencies that hinder return. Of course it could work out well, as could picking individual stocks. But I'd earmark some money in a brokerage account for them and sit back for 10-15 years. They've got support and - I think this is important - flexibility. If all goes according to plan our boy'll inherit our brownstone. I hope he sells it and finds his own path in a corner of the world he loves like we love ours.

Good luck OP.

[TomatoTomahto]

OP, just for 4 data points:
My 4 kids live in London, NY, NC, and OR. We live in MA. 3 of my 4 kids could easily buy a house, and one of them did at age 40+, after a stint in the Peace Corps and various moves for employment. The others all rent. Home ownership is over-rated.

[Oddball]

I am a landlord with young kids. Do I think "Some day this rental unit will be great for one of my kids to move into." Yes, of course I do. Did I buy any of the units specifically for my kids to live in? No way. As others have mentioned, my kids could go to college and then never move back to this area again. They might want to live in a different part of town. Etc.

[CaptainT]

Over the next 20 years the baby boomer generation currently 58 to 76 will die or age out of living in their homes . As baby boomers currently have just under 40% of the homes despite being about 20% of the population there are likely to be large demographic shifts and shifts in home stock. I would think it unlikely that a home you pick for a middle school kid is the one that a young adult would want to live in. Invest themoney in index funds instead

[DoTheMath]

What are the chances that she will want to a) own a house in her twenties, b) want that house to be in this city, c) want that house to be in this particular location, d) be this particular house, and e) not be resentful that these decisions were made for her? Whatever you estimate, be sure to divide by two (at least!) to account for a significant other who has their own opinions, as well.

If you want to save money towards an eventual gift to your daughter that she could use for a first house, that's up to you. This plan seems to be that but with extra steps.

If that's what you want to do, invest as you deem appropriate and forget the dream that your daughter will happily spend the rest of her days living down the street from you.

[sleepy06]

I believe that this is a well intentioned post, but I am dubious as if things will proceed as you have envisioned. I believe the best thing you can do is place excess funds in the market to appreciate overtime and continue to build a strong relationship with your child. Whenever they are an established adult, you can have the conversation with them if they are receptive to you living in their community and I think it works best if the parent is willing to move where the child is. Both of our parents have firmly stayed where they are, and we have offered to even buy them a home in our neighborhood or to contribute funds to such, but no one has interest in moving from their area. Which, we understand , but they at this point in their life are much more able to move than we are due to constraints that we have. We did move to this area to be close to our families-within a few hours in one case- and so any closeness that we needed to achieve had to come through our actions, although we feel with our children, we will move wherever they are if that is possible, and if they would like for us to live close to them. *dictated so please excuse phrasing*