We all know how ridiculous house prices are currently in Sydney, Melbourne and Perth, so how are our children ever going to be able to afford a house in 10 or 20 years?
Blogger: Todd Hunter, director, wHeregroup
The answer is that they are not…
Well, not without some serious heart ache or help from you…
Yep, M&D you ain’t out of it yet… they may have left the nest but they are still going to be dependent on you for a while to get a place of their own… unless…
Unless they have a fantastic well-paying job, have a strong business head on their shoulders or…
Get help from you.
So why not be smart about the help you are probably going to have to give anyway???
Sure you can tap into some equity in your home in 20 years and give them a deposit for a house. But that may mean you are now back in debt yourself, when you really shouldn’t be. Or you may not even be in a financial position to be able to offer them that privilege. Not to mention, you should be looking at your own retirement plan and you probably don’t want to factor in this huge financial hurdle into that plan.
So why not do it now???
Why not get them into a cheap property now (in the right location of course) and let it sit there for 10 or 20 years and grow in value. Then once the property is sold, they have a ready-made deposit without you having to dip into your own savings or equity further.
Given kids are not buying their first home until they are in their late 20s or 30s – doing this when they are in their late teens is not too late…
I would stick to cheaper properties as they tend to pay for themselves, meaning the rent pays the interest on the loan, so any extra payments they make go directly off the principal of the loan.
Even $100 per week over the interest repayments equals $52,000 over ten years. But with the snow-balling effect, this will snow ball to more "thank yous"… and greater cash when the time comes that they need it.
So let’s number this out a bit more for you… you have one child, 12 years old. You buy a cheap property for them. Now when I say cheap, there is no reason why you cannot buy a property for under $250,000
Where are they?
All through regional NSW and Victoria, Tasmania (you can buy for $150,000) and regional SA in good areas that over the long term will perform well enough to help the kids out… sure Sydney and Melbourne will be better locations to invest in generally but remember we are trying to build a deposit for the kids over a 10 to 20 year timeframe.
And you want properties where the rent pays for the interest on the loan.
Sure you can invest in higher-priced properties but this will depend on the level of help you want to give,the amount you have to invest and the number of children you have… so we have kept it at a budget level for you…
So as your gift to them, you fund the deposit (under $30,000) on the property and you pay the council and water rates plus insurance each year at around $2,500. You could use equity to fund the $30,000 if you have this available.
Be wary of the trust structure as land tax may kick in from $0 and the savings you may think you are making over 18 years can far out weigh selling the property and paying CGT and stamp duty again. Talk to your accountant here first…
Now you have invested in a regional location for $250,000, which rents for $290 per week. Given these are long-term investments it would be advisable to lock in the loan at a good low fixed rate whilst they are low. Rates are currently around the low five per cent mark.
But don’t keep the property a secret, let the children know what you have done… let them get an appreciation of what you have done for them along with knowing that this is theirs, ready for when they want to buy their own home. Even go as far as creating a photo folder, so they can look at the property often. This will help spur their interest in bricks and mortar. Let them file the rental receipts and loan statements into the folder so they have a sense of ownership.
Even better, why not get them start paying off the principal now… ???
Start teaching them the value of a dollar, so when they start earning pocket money by doing chores, they start to put 50 per cent of their pocket money onto the loan.
Even if its only $2, make sure they put that aside… at first they will not want to but after a while they will insist that they put it onto the loan.
Teach them the effects of compound saving – there are plenty of websites that can help you explain this.
But you MUST put this money on the loan - DO NOT forget. Then show them on internet banking so they see what is happening. The penny may not drop straight away, but it will. When the loan statements come in for the loan, make sure you give them a copy to put in their folder so they can see the benefits of what they are achieving.
You are teaching them good financial practice.
As the rents increase over time, and the loan starts to become more positively geared, put all the extra rent onto the loan, paying down the principal.
You may even find that they start wanting to mow the lawns of the entire street to earn more pocket money…
What have we created???
This desire will increase when they get their first pay packet in their part-time job. Same deal, keep it at 50 per cent of their pay packet to go towards their loan.
So by the time they get their first full-time job, they will be in tune with the right savings attitude and put aside as much as they can towards the loan. 50 per cent would be ideal but may be unachievable pending their lifestyle at the time. They should be able to put at least 30 per cent aside if they still live at home.
Now until they have a full-time job, the principal will reduce very minimally. But now they are working full time and earning say $30,000 per annum, this means they earn $532 net per week.
If you don’t start 'til they are 18 years old then they could also go onto the loan with you even if they don’t have a job. That would give them a sense of responsibility for the property. (This may not be an option for everyone.)
So putting aside 50 per cent each means they are putting $266 per week onto the loan = $13,832 per annum.
At this rate the positive gearing is increasing weekly and creating a snow-ball effect… getting bigger and bigger as it rolls on…
From here it gets hypothetical - but lets work on one scenario. They stay home 'til they are 25 years old. They increase their income each year by $2,000 gross from 18 years old til 25 years old. Very easily achievable.
And up to 18 years of age they have accumulated $10,000 onto the loan through doing chores at home and working part time etc… I have assumed an interest rate at five per cent (although it won’t stay there forever, but you will lock in for the first five years)
They stick to their 50 per cent net income savings regime whilst living at home. The rent on the property increases by $10 every six months = $20 per week per annum. This would be the loan balance after each year…
Year 1 = $214,637 (principal reduces by $25,363 – includes initial $10,000)
Year 2 = $195,408 by $19,229)
Year 3 = $173,420 (by $21,988)
Year 4 = $148,530 (by $24,890)
Year 5 = $120,641 (by $27,889)
Year 6 = $89,699 (by $30,942)
Year 7 = $52,551 (by $37,148)
So you can see the snow-ball effect created by increase in income, increase in rent and compound interest savings.
Now I don’t need to show you that if they went on until they were 30 years old that they would fully own the property.
And here’s the kicker… from 12 years old til 30 years old = 18 years… so if we use a minimal four per cent capital growth (this is low) on the property for the 18 years, then that $250,000 property is now worth $526,000 – and it’s costs you around $75,000 ($30,000 initially + (18 years x $2,500 holding costs per annum)).
Now we’re talking… $500,000-odd will certainly get them started in the property game… and obviously you’re going to need a good buyer's agent to get that property in the right location for you.
With all that financial training, they may well pay the favor back to you when you retire…