An Equity Sharing Arrangement
Might Be The Answer . . .
Parents helping their children invest in their
first home is certainly
not a new idea. We see a variety of choices being
made in the marketplace. Some elect to co-sign
on the mortgage with the
children. It doesn’t cost Mom and Dad any money,
but it may help
the children qualify for a loan. Others either
give or lend money
for the down payment. A few
even decide to put enough money to “buy down”
the mortgage interest rate, allowing for the
rate to be lower
in the first few years, making it easier to
qualify for the loan by lowering the monthly
payment.
The concept of equity sharing, although used by
builders and real estate investors, may also be
one of the best methods for helping
the kids buy a house. Shared equity allows the
children to feel less indebted than with an
outright loan, and at the same time gives
parents an added tax advantage.
An equity sharing
arrangement might work like this: The young
homebuyers purchase a home jointly with their
parents, they
split
the down payment and ownership costs including
monthly payments, and the children rent the
parent’s share of the home. The benefits to the
young homebuyers include affording a larger home
for less money, having lower down payment and
ownership costs, ease of qualifying for the
loan, and the beginning of building an
investment portfolio. The benefits to the
parents include
helping the children to afford a
home, receipt of rental income, financial and
tax benefits, increasing their investment
portfolio,
and having a reliable tenant.
When the home is
sold, perhaps after a specified period of time,
the parents get back their initial investment,
and the additional proceeds are shared in
proportion to each one’s investment.
While shared
equity can be arranged between perfect
strangers, the beauty of this agreement is
seeing a family investing wisely together, with
both parents and their children gaining benefits
they may not otherwise obtain alone.
Both parties
should exercise due diligence by receiving
counsel from experts in the areas of accounting,
financial planning, and legal.
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