How to buy an investment property with your children
Rent near college campuses can be very high. Landlords are typically making a good return on their money. What if that landlord was you? In one transaction you could:
- Provide your child with a safe (and cheaper!) place to live.
- Purchase a rental property for 3.5% down instead of the usual 20-25% usually required for investment properties.
- Develop an ongoing source of business income.
- Teach your kid how to handle money wisely and learn wealth strategies.
If your child is going to college or graduate school, you can purchase a home near their school with them. FHA allows parents to co-sign their mortgages as joint co-signers. Your child must live in the property for at least one year.
Investment properties typically require 20-25% down and the interest rate is higher. When you co-sign on an FHA loan you can get an investment property for 3.5% down and at the lower owner-occupant mortgage interest rates. So, for a $200,000 rental property, you would be looking at a $7,000 down payment as opposed to at least a $40,000 down payment with another type of investment loan. FHA will also allow you to purchase properties that have up to 4 units. So, you could buy a fourplex, triplex, duplex or single family home and rent out the other bedrooms to cover or at least off set the cost of the mortgage.
In exchange for living cheaper or free, your child could handle the property management tasks; finding roommates, signing leases, collecting rents and handling repairs. Schools don’t teach how to build wealth; our children learn that from us. If you want to pass on financial investing knowledge, how to pick good friends (tenants!) and how to invest in real estate this can be a great way to do it. Through this process you can teach your adult children how to find a good real estate deal, secure a loan, calculate cash flow and learn the tasks associated with property management – collecting rents, filing evictions, enforcing leases and maybe even some DIY projects to increase the property’s value. This process, if done well, also boosts their credit score and sets them up to be able to make future purchases on their own.
This only works, though, if your kid is on board and has the maturity to be able to handle these responsibilities. You need to think through this carefully before moving forward because if your tenants stop paying rent, you still need to make the mortgage payment. Or, if your property manager child allows parties that trash the house or conditions to deteriorate – you may find it difficult to evict a tenant who is causing problems. If expectations are not clear, or not met, it can put a strain on finances and your relationship. Many kids may not have the maturity to handle these responsibilities at this point in their lives and these lessons will just need to wait until later when they are ready. But, if your young adult can step up to the challenge, it is a great way to get involved in the being a landlord.
As with any rental property you need to have talked through your exit strategy before purchasing it. When your child finishes school, is the property in a location you could continue to manage it? Will one of you buy the other out or will the property remain in everyone’s name? Leaving the rental in their name may make it more difficult for them to buy their first home when purchasing on their own. There are many things to think about prior to entering into a rental property purchase agreement but it can be a great way to get an investment property for a small amount down!