With the new university year underway, parents and kids alike are facing overwhelming rent costs. Not many students have the option of living at home and housing accommodation doesn’t come cheap these days.
Consider this option: Parents play ‘landlord’ to their children.
According to TD Canada Trust, one in every ten Canadians is considering this possibility; this number is up from 5% of Canadians just a year ago[i].
However, there can be severe tax and estate-planning repercussions with this route[ii] .
- If you purchase a second property in your own name and then rent it out to your child, this second home won’t meet the requirements of the tax-free capital gain because it won’t qualify as a primary residence.
- An alternative is to present the cash as a gift to your child. Then they can buy the property in their own name.
- You can lend your child the money by setting up an interest – free mortgage.
With the last two options, your child can still reap the benefits of being a first time home buyer. These benefits include the land transfer tax rebates and use of the First Time Home Buyer’s Plan (HBP).The obvious benefit of such an arrangement is that the money stays in the family.
Another possibility that is becoming increasingly popular is purchasing a property for your child near their university. Since they will need accommodation anyway, why not use the opportunity wisely. For example, you could put in a 20% down payment (the minimum amount to avoid CMHC insurance) on a $250,000 3-bedroom property in Hamilton. Your child could get a $200,000 mortgage for an amortization period of 30 years.
*Based on Ontario mortgage rates on August 8th, 2011
By renting out the other two rooms at $500/month, the property basically pays for itself.
There are obvious concerns with such a financial move, including:
- Is your child responsible enough to entrust a property with?
- Is your child ready to balance the responsibilities of being a live-in landlord, with school and other activities?
- Are you and/or your child ready to cover the mortgage payments in the event that you are not able to get renters or if rent doesn’t come in on time? Keep in mind that students aren’t always the most responsible tenants.
By investing in a property at the beginning of your child’s university experience, you will have something to show for the money you spend. Plus, you will eliminate the stress of looking for accommodation every year. This is assuming you feel your child passes on the concerns listed above.
Best of all, at the end of their university degree, your kids will have a property that they could sell for a considerable return. With the proceeds going back to the generous parents, of course !