Why Parents Should Buy Their Kids A House

Today, I want to talk to the parents of 20 somethings. I'm gonna give you my best case scenario on why you should help your kids buy their first home.

To the parents of 20 and 30 somethings…

…that haven't bought their first home yet. And if you don't fall into one of those categories, well stay tuned anyways - you're gonna be the ones that share this with your parents. I don't think it will take me too long to build my case.

I think that parents should provide their kids with the down payment for their first home.

How you choose to do this is totally up to you. You can gift it to them, you can loan it to them. Whichever way is completely up to you. The point is, that you get them a down payment.

Here in Canada, it's required that we have a minimum of 5% down when you purchase a property. And here in London, the average home value is around $530,000 here at the end of 2020. Now that's probably a bit aggressive for a first-time home, so let's use a value of $350,000. A 5% down payment on a $350,000 home would be $17,500 but let's round that up to $20,000 (you'll help them with some closing costs as well) and that should cover them and allow them to buy that first home for $350,000.

Assuming that your child is gainfully employed, don't have massive levels of debt and have a somewhat reputable credit score, then there shouldn't be an issue for them to get a mortgage on a property like that.

Increasing Home Values Will Help You

Over the past four years here in London I mean homes have gone up significantly well over 10% per year, but that's not typical. In a typical year we would see more like three to 5% appreciation. So let's say your child bought that home for $350,000 here in 2020, and for the next few years we see 5% appreciation on that property. By the end of the second year that home is going to be worth $385,000. They could then take that equity that they've built into that home, pull it out and pay you back on that loan.

While this is an overly simplified analogy of how to get your kids into real estate…

…I think it proves the point that getting them in sooner rather than later can be beneficial. And there's not all that much risk to it. I believe that real estate is the average Canadian's greatest wealth builder. In fact, as the equity grows in their property a lot of times they leave it untouched. And when it comes time for retirement, selling their home is one of the biggest contributors to their retirement funds, so the sooner they get into owning their own home whether it's in their 20s or 30s is better.

The person who buy their home in their 20s is significantly further ahead than the one that buys their home in their 30s. While there's a lot of nuances to this conversation and I wanted to keep it very simple, I think that there's a lot to be taken away from this conversation, especially as we look at the demographics that we see nowadays. With boomers holding a large amount of wealth that they will eventually pass along to younger generations, I say, why not do it sooner? Why not give them the opportunity to get into home ownership, pass that money along to the 20 something or 30 something that needs a leg up, especially as the younger generations get buried by more and more debt.

I think it's a really, really simple way for parents to give their kids a leg up with very, very limited risk. If you're a parent and have more questions then feel free to get in touch. If you're a 20 or 30 something looking to buy your first home, then send this along to your parents. That's it for me, send me a message by clicking the button down below with any questions that you have and I'll be happy to answer them in a future post.

Questions?

What is a Home Equity Line of Credit?

What is the difference is between a home equity line of credit and a cashout refinance, also called a home equity loan?

What is a home equity line of credit?

One of the things here in Canada is that a bank will actually let you borrow against the equity in your home. And a home equity line of credit is basically like a normal line of credit, except the collateral is against your home. So if the bank determines that there is $100,000 worth of equity in your home, they will give you a line of credit for that $100,000. You do not need to use it right away, it will sit there just like a line of credit would. And as soon as you do use it, then that's when you start paying interest on it.

And in fact, a lot of times those home equity line of credit loans are actually interest-only payments. So that's all you're required to pay on them. So the cost to actually use them is very, very low.

Home Equity Loan

So now that we know what a HELOC is or a home equity line of credit is, let's talk about what a cash out refinance is or a home equity loan. So this is basically the same thing where the bank is going to give you a loan against the value or the equity that's in your property, except it's not gonna sit in the line of credit, what it's gonna do is they're actually gonna hand you that $100,000 that I had mentioned before and it would be sitting in your bank account and they're gonna set you up on a predetermined payment schedule, much like a mortgage.

Home Equity Line of Credit (HELOC) vs Home Equity Loan (Cash Out Refinance)

So when would you actually use a home equity line of credit or a home equity loan? And is there really a reason you'd use one over the other? And I think there is. So if you're using a home equity line of credit, you don't actually pay to use it until you've taken some money out of it. With a home equity loan or a cash out refinance, you start paying right away. So sometimes people will use that, if they know that they're gonna use the money right away, they have the cash right in their account. But a lot of times the home equity line of credit actually offers you more flexibility than a cash out refinance will.

If you have any further questions about the difference between these two types of loans, then leave a comment down below. I'd love to chat with you.

Questions?

Why small town real estate is a GREAT investment

First, I have a small disclaimer. As much as I think investing in small town, Ontario is a wonderful idea, it doesn't mean that investing in big city, Ontario is a bad idea. It's just different.

Purchasing Power

Here is my first point, and it's really simple. It's just that your dollars go further. Your purchasing power is more. So for example, you take the exact same two houses and you put one of them in the big city and one of them in the small town, you're just gonna be able to purchase that home in the smaller town for less money. So your dollars go further. And I know some of you are gonna say, yeah, but Cory, a big part of the value of that property is its location. And you're right, it is. And I'll come back to that.

More Income Potential

The second point that I think is worth making is that your rent actually isn't that different between big city, Ontario and small town, Ontario. In fact, they can be only marginally less than what you would get in the big city. So if you're keeping track, you've now bought a property for less money, but you're generating the same amount of income. So your dollars are doing more for you. Remember when I said I was gonna circle back to location? Well, here we are. I think it's important to pay attention to where you're going to invest. And investing in small town, Ontario is good, but it can't be too small. Or perhaps I should say it can't be too far away from the big city. You don't wanna buy out in the middle of nowhere.

In fact, when we bought our first rental property, it was just outside of London and we reaped the benefits of paying a lower price, but collecting similar rents to inside of the city. However, over the course of us owning that property path and progress has come out to us. People have begun to move into that small town more and more and it's disproportionately pushed the value of our property up compared to the big city. So all of this has allowed us to take that first property and springboard us into more investment properties, more in small towns, more in big cities as well.

Regulation

Although it may not be quantifiable by any specific metric. And it's regulation. The reality is the properties that we have in London just have a lot more regulation around them. The city of London makes us jump through a lot more hoops in order to comply, whether it's registering your property with the city of London, through paying a licensing fee, or they demand that you have the fire department come through, you don't see a lot of that in smaller town, Ontario.

In fact, they're just happy that you are providing housing for people that are looking. There's not a lot of rental properties in small town, Ontario. So the municipalities are generally very happy to see you providing it and we'll leave you alone for the most part, unless you're doing something specifically egregious.

One last disclaimer

Do your homework. Do the homework on the economics surrounding the town that you're looking to invest in. Is it a actual good spot to invest in? Don't buy out in the middle of nowhere where the path of development's never going to reach there or it's gonna take forever and ever for it to reach there. So do that homework. And if you don't know what that looks like, get in touch down below and I'd be happy to explain that a little bit more. So if you get the fundamentals right then you're gonna reap the benefits of disproportionate cashflow and disproportionate appreciation on that property that you've purchased.

If you're considering jumping into the investment game or you're looking for your next investment property, then I hope you'll consider small town, Ontario. Not only is it a market that is drastically underserved and you'll be serving that need, but it's also a great investment, which is a win-win for everybody. And I love when that can happen. So that's it for me until next time, I hope you have a wonderful day.

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