Author Topic: Planning for next generation's real estate purchases  (Read 2769 times)

Sun Hat

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Planning for next generation's real estate purchases
« on: January 19, 2018, 09:44:26 AM »
In most of Canada (outside Vancouver and Toronto areas), property prices increase on average about 5%/year from what I've been able to judge (it may be less in very rural areas). With real wages only increasing between 1.1 and 1.5% per year, that leaves real estate increasing in price 3.5%/yr faster than wages.

As a child-free homeowner, this wasn't really at the forefront of my worries until a recent conversation with my sister, who has two kids. She worries about her kids' ability to own their own homes and the likelihood that they won't be able to afford a similar standard of living as we have been able to have with our "normal" (but actually upper-middle income) jobs.

Which brings me to wondering about how to plan to help my nieces gain entry to home ownership with the help of a down-payment. They're 5 and 7 now, so I'm working on a few planning assumptions
1) 20 years until money is needed
2) Property prices will increase 5%/year, which is 3.5% faster than wages
2B) A property that costs $250k now will cost $678K in 20 years, which will be as affordable as a house that costs $500k now
3) Investments will earn an average of 5%/year
4) I want to gift them enough so that they can pay off the remainder of a mortgage on a modest property in 20 years

I'd like to solicit your thoughts on saving for kids' property purchases down the line, particularly from those who live in areas where prices are also rising faster than wages (UK voices?).
What are others doing?
How are you saving (buying rentals to sell later, or investing)?
How much should I save for each kid? By my math, they'd each need at least $300k in order to be able to pay off the remainder (this is far more than I have, but I might be able to get there in 20 years).
What am I missing?

Ceredwyn

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Re: Planning for next generation's real estate purchases
« Reply #1 on: January 19, 2018, 10:22:34 AM »
I'll tackle your last question "what am I missing" - consider your assumption that property prices "average about 5%/year except for very rural areas" and ask yourself whether that is an unbiased best estimate for the future or just a straight line extrapolation of the somewhat recent past. For example, between 1981 and 2002 the average real change in canadian house prices was zero according to the Dallas Federal Reserve's Canada International Real House Price Index.

No one knows the future. Maybe it will keep going up by 5% a year but I don't see why you would assume that for the purpose of 20+ year projections. That said, if you think that assumption is a good one then the easy answer to your question is to buy two cash flow positive rental properties and give them to your niece/nephew in the future at which point they can either keep them or sell them to buy a similar property elsewhere.


snacky

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Re: Planning for next generation's real estate purchases
« Reply #2 on: January 19, 2018, 10:23:38 AM »
5% a year for the past several year sounds right, but that's not forever. There are periods of depreciation and stagnation. Between rising interest rates and new mortgage regs we can expect house prices to drop over the next little while. We're already seeing it - a year ago things were selling quickly, and for more than they are now. I'm currently looking for an investment property and things are just sitting on the market for long periods, and eventually selling under asking. It's drastically different than when I bought a year ago and there was a sense of urgency because nothing was sticking around for long.

I think that in the long run, the cost of housing is tied to local wages, at least in markets where there isn't global demand. Vancouver and Toronto are their own thing, but our city? Much more moderate.

Jrr85

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Re: Planning for next generation's real estate purchases
« Reply #3 on: January 19, 2018, 10:40:52 AM »
5% a year for the past several year sounds right, but that's not forever. There are periods of depreciation and stagnation. Between rising interest rates and new mortgage regs we can expect house prices to drop over the next little while. We're already seeing it - a year ago things were selling quickly, and for more than they are now. I'm currently looking for an investment property and things are just sitting on the market for long periods, and eventually selling under asking. It's drastically different than when I bought a year ago and there was a sense of urgency because nothing was sticking around for long.

I think that in the long run, the cost of housing is tied to local wages, at least in markets where there isn't global demand. Vancouver and Toronto are their own thing, but our city? Much more moderate.

They are, but that doesn't mean prices can't increase faster than wages for a long time because of leverage. 

i had assumed that real estate prices had to come back down in major urban areas.  But if you make the assumption that (1) wage gains in major urban centers will on average continue to outpace inflation for non-housing items, (2) people are always going to continue to be willing to be house poor, (3) living in cities will continue to offer the best work opportunities, and (4) people will continue to buy primary homes with 20% to as little as 3.5% downpayments, then home prices can grow faster than wages more or less indefinitely. 

I think what is going to bring housing down in most major urban areas (at least in the U.S.) will be less demand as a result of continued migration towards lower tax jurisdictions as federal tax law shields less and less of the burden of state taxes. 

ooeei

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Re: Planning for next generation's real estate purchases
« Reply #4 on: January 19, 2018, 02:08:31 PM »
The sentiment is nice, but is that really the best use of that money? Giving them a "gift" that ties them to a monthly payment they admittedly can't afford and keeps them in one location that requires lots of maintenance?

It's great you want to do something nice for them, but giving a 25-27 year old a $150k incentive to buy a home they couldn't/wouldn't otherwise buy doesn't seem like the best use of the money to me. Just because that's you and your sister's version of a happy life doesn't mean it will be for the kids.

If they have their shit together they won't need the gift, so maybe use some of it over the years to help make sure they have their shit together? Help pay for a study abroad in school or a few overseas trips, pay for some expenses during college or the first month's rent for their apartment near their summer internship, help them start an investment account when they are in/graduate college and put a few thousand in it for them. You could even start an investment account right now in your name and add a certain relatively low amount every year with it earmarked for each of them, and give it to them when they turn whatever age. Use that as the example of savings and investments adding up over time.

I'm sure you can come up with plenty of other options, but giving them money with the stipulation that it must be used on a house purchase just seems like forcing them into a decision that may not be the best for them.

Sibley

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Re: Planning for next generation's real estate purchases
« Reply #5 on: January 19, 2018, 03:11:16 PM »
The fact that people are worried about future generation's ability to afford to buy a house tells me one big thing: there will be a correction. If home values are too high, then at some point they will decrease. Realistically, there's a ton of property owned by the Baby Boomer generation, and the Baby Boomers will die. I'd expect that to help reset some markets. If you can't afford a $400k house, you're not buying a $400k house. At some point the $400k house will drop to whatever the market will bear.

Sun Hat

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Re: Planning for next generation's real estate purchases
« Reply #6 on: January 19, 2018, 05:38:33 PM »
Thanks all for your replies and perspectives, they're all good for me to hear.

It's good to hear that others aren't as worried about real estate becoming un-affordable. My 5% rate was indeed pulled from the vicinity of my backside with little basis (the neighborhood where I grew up), since I didn't know where to find long-term stats for this. I'll definitely have a look at the reference that Ceredwyn mentionned so that I can educate myself a bit further.

I had considered looking for rentals to buy now and sell when they reach 25 to give them that amount in cash, but I haven't done any proper research into finding cash-positive rentals in my area - the few I looked at were definitely on the cash-negative to neutral line.

Ooeei  - I particularly want to thank you for challenging my assumption on what kind of life my nieces will want! I'll have to think about how I'd feel if they spent the money otherwise. I'd have no problem with it if it went to funding grad school or a business, but I don't want to find myself regretting it if they spend it on funding a destructive lifestyle or even on an awesome decade of fun. It's a good thing that I have a long time to think about what to do.


Freedomin5

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Re: Planning for next generation's real estate purchases
« Reply #7 on: January 20, 2018, 04:41:35 AM »
Torontonian here so I understand the insane cost of housing. My parents helped us with a down payment for a condo. But they didnít gift us the money. They saved it up in an investment fund (index fund), and let it grow over time. Then, when I came time for me to purchase a place, they walked me through the math. First, they worked with me to make sure I could afford the monthly mortgage payment and other expenses associated with owning a home. Then we looked at how much I already had saved, and how much mortgage I qualify for. Then we looked at the gap between what I had saved and the down payment+closing costs. They LOANED me the difference with a 0% loan.

Teaching me the process of figuring out how to afford a home was more valuable than the actual gift of the money.

In your case, perhaps save up the money. Then when itís time for your nieces to purchase their own place, walk them through the process - give them the gift of financial knowledge and wisdom - and then you can offer to help as much or as little depending on their personality and situation and whether they will waste the money. Definitely donít let them grow up thinking their relative will buy them a house when theyíre older.

Sun Hat

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Re: Planning for next generation's real estate purchases
« Reply #8 on: January 20, 2018, 06:48:13 AM »
That's a good point. I think that the worst thing that I could do would be to tell them ahead of time that they would be getting money, since I really don't want to foster attitudes of entitlement or sloth.

I think that I'll start by giving them copies of The Wealthy Barber, Millionaire Next Door or another easy to read basic personal finance book when they're teens to instill the idea of thrift and savings. Perhaps I could  encourage that by matching their savings and investments, so that the money is theirs to use as they see fit, but so that they only access it with responsible actions. I live far from them so it needs to be something that doesn't use up all of our limited one on one time.

0% loans are another good idea - no surprise that this crowd has had useful experiences to share! I want to make sure that whatever plan I go with that it'll be equitable to both sisters even if they opt for different paths (ie if one chooses not to buy a home)

Freedomin5

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Re: Planning for next generation's real estate purchases
« Reply #9 on: January 23, 2018, 07:16:34 AM »
Those are good books. I think I read The Wealthy Barber when I was 15 or 16.

Subsidizing further education is also often a good idea. We have a couple family members to which we give monetary gifts to help with tuition, but only if they maintain a good GPA.

Finances_With_Purpose

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Re: Planning for next generation's real estate purchases
« Reply #10 on: January 23, 2018, 08:27:35 PM »
It's hard to make any useful assessments that far out.  I might not bake in a 5% rate either, for reasons others mentioned.

Also, consider this: let's say you're right, but what of taxes (if they tax real estate there)?  Maintenance - especially if you project it at 1% of home value per year?  Ancillary expenses?  Labor for work done on the house (presumably increasing too - to be able to keep up with housing costs).  Housing is only part of the equation.  The kids would need a good stache + lots of responsibility to handle all of those things, too.

I LOVE the thought of what you want to do and why, and I wish I had better answers... :/ 

katscratch

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Re: Planning for next generation's real estate purchases
« Reply #11 on: January 24, 2018, 09:42:31 PM »
In my case I'm doing absolutely nothing for my college-age son, as he's on track to make a salary twice mine his first year out of college ;) and has stated he prefers not to buy for at least 10 years.

My finances aside, I had a conversation about this topic with relatives a couple of years ago after they were overly enthusiastic about the fact I own (mortgaged) a house.

My son and all of his friends that routinely come over are not planning to buy in the foreseeable future. All of them, with a huge variety in their current schooling and economic backgrounds, do not want to be tied to one geographic location in their 20s and possibly through their 30s.

In conversations with them, they see absolutely no social status in owning a home (which is the opposite feeling of my 60-70 year old relatives). They do see social status in being able to move for better opportunities, both job related and personal.

I absolutely love that you are thinking this way already. But I agree with not getting too hung up on funding housing specifically.

Sun Hat

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Re: Planning for next generation's real estate purchases
« Reply #12 on: January 25, 2018, 09:07:25 AM »
Since starting this thread, I'm leaning towards offering to match their investment contributions so that they gain a financial education and can choose how to spend it.  My contribution ratio, limit and duration of the deal will depend on my savings at the time.

Freedomin5

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Re: Planning for next generation's real estate purchases
« Reply #13 on: January 25, 2018, 11:52:39 PM »
I like the idea of matching investments as well. How will you keep them from purchasing an investment and then immediately selling after receiving your match?

ooeei

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Re: Planning for next generation's real estate purchases
« Reply #14 on: January 26, 2018, 06:25:37 AM »
I like the idea of matching investments as well. How will you keep them from purchasing an investment and then immediately selling after receiving your match?

Yeah, I'd vote for giving them an interest rate rather than a match.

Retire-Canada

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Re: Planning for next generation's real estate purchases
« Reply #15 on: January 26, 2018, 07:39:09 AM »
People don't need to own houses/real estate to live amazing wonderful lives so I wouldn't look at the situation like those kids will either get into RE [and win!] or not get into RE [and lose!]. Bottom line you want them to have someplace comfortable/safe to live so they can realize their life goals. Renting is not an obstacle to achieving a great life.

So I like you approach later in the thread OP where you are going to help pass on some knowledge and perhaps match savings with them.

Looking back at my formative years I paid attention to all the adults around me and made a note of the ones whose lives looked awesome to me and then got into the details of those people. That pointed me towards a university education, high level of communications skills, no debt, and high paying job.

I think the best gift you can give those kids is 1) be a great role model and 2) share your knowledge experience with them and 3) support them in achieving their life goals. These are way more important than a trust fund or a lump sum gift in cash to buy a house.

ChpBstrd

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Re: Planning for next generation's real estate purchases
« Reply #16 on: January 26, 2018, 08:32:14 PM »
I was born with a silver spoon in my mouth. By the time I went to college in the mid-90s, my family (mostly grandpa) had managed to amass $20,000 in my college savings brokerage account.

I got good grades (3.6 high school GPA) and drew equivalent 4 year scholarship offers at two universities, the State U and a locally respected private college. I went to the State U because it would allow me to graduate without debt. In fact, I managed to pay for living expenses and books throughout college on part-time work and leave the $20k untouched.

Three years out of college and aged 23, I spent the $20k as the vast majority of my house down payment. My friends were stunned. I believe this is the outcome you're hoping for, OP. It took a lot of the right decisions on my part: good grades, cheap college, low spending during college, working PT during college, avoiding debt, and choosing to continue to live in a LCOL area.

In hindsight, it was all suboptimal. I exactly followed the advice of my baby boomer parents and their peers to "buy as much house as you can afford" because it always goes up in value and also so you "don't have to upgrade later". So there I was, the only person living in a ten year old 3BR/2BA 1600sf house in the suburbs. Worse, I lost the flexibility to pursue better jobs across geography at that critical time when my earnings trajectory was just getting started. Even worse, I could have bought Amazon.com for $20/share with the $5,000 I spent tiling the bathroom or the $5,000 I spent on HVAC, or the $5,000 I spent on exterior repairs (NEVER buy a 10 year old builder's grade house). At least the mortgage was cheaper than renting a 2BR apartment.

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What will the next generation think of all this? We can't say for sure. They'll make their own decisions just as I made mine. Several friends of mine went to expensive colleges and left with debts many times higher than my $20k trust fund. Others goofed off in high school and went without the benefit of scholarships. Others bought a single new car - enough to destroy my entire trust fund. There are so many right choices that have to be made in a row. My college savings gave me the flexibility to do lots of things, and I did some things right, others not so well.

Last, I wonder why big HCOL cities still exist at all. Hundreds of millions of people driving cars from their overpriced building to someone else's overpriced building to work on the internet at that location. Find the inefficiency there. Then tell me what 20 years from now looks like.