11/5/24 – Helping Adult Children Buy Homes: A Win-Win for Everyone

Many of you have clients or know families where adult children live at home or rent in expensive areas. With home prices still high, affordability is a big challenge. And let’s be honest - renting is waste of money unless they rent from me. When parents have home equity that can be leveraged to help their children buy a home. So how do we help these young adults, or their parents, get into a home? Let’s break it down with an example to show how this can work financially for both parents and their adult child.

Scenario: Parents Helping Their Adult Child Buy a Home

Let’s say Mom and Dad own a property worth $1.1 million and have a mortgage balance of $500,000. Their adult child, Johnny, is 25 years old, has a good job, and can afford to pay $2,000 monthly, but he’s renting or living with them. Mom and Dad are interested in helping Johnny buy a home, and they hear from their real estate agent that many parents are using home equity to co-invest with their children. After consulting with a financial advisor, they decided to take out a Fixed Rate Home Equity Line of Credit (HELOC) for $180,000 at a rate of 6.724%, which results in a monthly payment of $1,365.87 over 20 years from Augusta Financial.

They use this $180,000 down payment on a new property worth $800,000. They put down 20%, totaling $160,000 + Closing costs will put them around $180,000. The new mortgage on the property will be $5,400 per month, and Johnny will live there, renting out three rooms to friends at $1,350 each. This brings in $4,050 per month in rental income, which covers most of the mortgage payment. Johnny will pay the remaining $1,350 on his own and also help with the HELOC payment, contributing $683 per month.

Financial Benefits for Johnny (The Adult Child)

• Rent Savings: Johnny was previously paying rent (possibly a high amount), but now, he gets to live in a house he co-owns with his parents. His monthly payments are $2,033, which is more affordable than paying for rent or living with parents.
• Tax Deduction: Johnny will be able to claim half of the mortgage interest on the new home. For the first year, the total interest is about $42,991, meaning Johnny’s share of the tax deduction is about $21,495. This will give him a tax refund of $5,158.
• Potential Home Equity Growth: Over time, the property appreciates. Assuming a 4% annual increase, after 5 years, the home will be worth $977,000, a gain of $177,000. Johnny will walk away with a 50% share of the profit when the house is sold.

Financial Benefits for Mom and Dad (The Parents)

• Lower Monthly Payments: By using the HELOC, Mom and Dad can finance the down payment for Johnny’s new house and contribute to the mortgage, but the costs are spread across Johnny’s rent payments and his share of the HELOC. Their monthly payment on the HELOC is $1,365.87, and the $683 Johnny pays for the HELOC reduces their costs.
• Tax Benefits: Mom and Dad can also take advantage of tax deductions. They will claim the HELOC interest (about $11,970 per year) and half of the mortgage interest on Johnny’s house. This means they will get a tax refund of about $5,158 from the main mortgage deduction and $2,872 from the HELOC.
• Paying Down the HELOC: The principal on the HELOC will be paid down by about $4,421 in the first year. Essentially, they are reducing their debt while helping Johnny build equity.
• Home Equity Growth: Just like Johnny, Mom and Dad will benefit from the appreciation in the property value. In 5 years, when the house is worth $977,000, they will also receive 50% of the profit (approximately $100,000), which they can use for their own financial goals or pass on to Johnny as a gift.

Selling the Property and Splitting the Profits

After 5 years, the house has appreciated by 4% annually, now worth $977,000. When they sell, here’s how the financial split works:

• Total Equity Gain: The house has increased in value by $177,000.
• Johnny’s Share: Johnny gets half of this equity gain and walks away with about $88,500.
• Mom and Dad’s Share: Mom and Dad also get half of the equity gain, so they receive $88,500.
• The mortgage balance will now be $602,000, so there is an additional $38,000 on the first, and the balance on the Home Equity line will be down about $26,000.

Tax-Free Gift: If Mom and Dad want, they can give their portion of the house to Johnny, who can use his $250K Tax exemption and gift Mom and Dad the $88,500 over the next couple of years (up to the annual limit, which is around $17,000 per parent per year). I know that is sneaky, but it should work; please check with your tax advisor!

Key Takeaways: Why This is a Win-Win for Everyone

• Johnny gets to own a home, build equity, and save on rent - all while enjoying tax benefits and eventual profit from the home’s appreciation.
• Mom and Dad help their child with homeownership, benefit from tax deductions, and reduce their debt while still seeing their property appreciate.
• Everyone shares in the equity growth, and after 5 years, Johnny and his parents could each walk away with around $100,000 in profit when the house is sold.

Everyone wins: Johnny gets a home, Mom and Dad help him, and both parties share the financial rewards.

This structure creates a mutually beneficial situation for both parents and their adult child, offering a pathway to homeownership for the child while giving the parents financial advantages and helping to strengthen the family’s long-term wealth and keeping your kids in California!

I would also like to know if you would like me to do this in a seminar setting with a CPA to answer questions and fears. We have clients with tons of equity, and tapping that equity with little to no risk and helping them and their children would be amazing!

I am available all weekend if you need anything. Let me know if you have any questions or if someone is interested in buying a property. My cell is 661-714-6258, and my office line is 661-260-2970 ext. 2222. My direct line is 661-291-2222. When you text me, please text (661-714-6258) or email me at Mike@AugustaFinancial.com.

But wait, there’s more!

Interest rates were better yesterday and worse all last week. Today, they are flat after starting out higher! We will see where the election takes us today, and if all goes well, we could see a nice interest rate dip!       

• 12-day escrows if your buyer is pre-approved - Conventional / FHA / Jumbo / Bridge
• We do loans in all states, so call me with anything you need.  
• Government Loans (FHA / VA/ USDA) are in the 5’s and 6’s.
• Conventional Loans up to $766,550.00 are in the 6’s
• High Balance Loans $766,550.01 – $ 1,149,825.00 are in the 6’s
• Jumbo loans above $1,149,625 are in the mid to high 6’s
• Bank statement loans - They are available with 10% down again, and larger down payments are in the 6’s.
• Profit and Loss Statement loans – 20% down – You don’t need bank statements, just a profit and loss statement!
• No income qualifier – 40% down with r serves In the 8’s!
• 0 down loans are in the high 6’s – 620 credit score min right now, up to $1,191,000.00.
• Private Money lenders - Hard Money Loans – 35% down!
• No Ratio Loans 30% down
• DSCR – Debt Service Coverage loans with as little as 15% down
• Bridge Loans - typically 7.99% with limited fees – and they get you where you need to go!
• 3/2/1 Buydowns 2/1 Buydowns and 1/0 Buydowns are available at great start rates!

Interest rates are subject to change without notice. The above are LA County Loan Limits.

Good News on condos- Nothing new today  

Bad News on Condos – Village Walk  – Insurance issues - Insufficient insurance.

All other naughty condos have been moved to MikeMeena.com. I will post updates here, but all the information on the naughty list is on my website. Just go there and click about, and you will find our most updated list.

Please let me know if you hear anything new on condos or townhouses.

I am still available all weekend if you need anything. Let me know if you have any questions or if someone is interested in buying a property. My cell is 661-714-6258, and my office line is 661-260-2970 ext. 2222. My direct line is 661-291-2222. When you text me, please text (661-714-6258) or email me at Mike@AugustaFinancial.com.

Have a great day and an even better tomorrow. Please call me when you have a client who needs to borrow!