You know that you can lend money to your child to help him or her buy Santa Cruz real estate. But you’d like to explore some other financial arrangements to determine which option is the most advantageous for you and your child.
Here are four additional ways to help your child buy Santa Cruz real estate:
1. Give the down payment as a gift.
Before deciding whether to make the money a gift or a loan, consider what moral message you may be sending. You don’t want your child to develop a sense of entitlement and take for granted that he or she can come to you any time money is needed.
If you decide you do want to give part or all of the down payment as a gift, consult with your financial adviser to determine the amount you can give away without incurring tax liabilities.
2. Co-sign the bank loan.
This could be all the help your child needs to get a mortgage. It might make sense if he or she is close to graduating from college and already has a job lined up or has solid but irregular income that would disqualify her or him from getting loan approval.
However, there are big risks associated with co-signing a loan. You're responsible if your child fails to keep up payments, which means the bank will come after you for the money. If your child is late with a payment, it impacts your credit score. If you want to get another loan for a home or some other big expenditure, you may find the co-signed loan uses up your borrowing ability.
Before co-signing a loan, get legal and financial advice. Also, if your child is married, be sure to have his or her spouse sign the loan and any other written documents that provide the terms of your agreement.
3. Set up a shared-equity arrangement.
In this arrangement, everything is open to negotiation. Typically, a written contract spells out that the child (as the homeowner) is responsible for mortgage payments and gets the tax deduction that comes with it, and you (as the investor) are responsible for providing the down payment.
Some of the conditions you’ll want to agree on before finalizing the agreement are: (1) who pays the property taxes, (2) whether or not your name will be on the loan and (3) when the investment will be paid back, through either selling or refinancing the Santa Cruz real estate.
Because of the flexibility inherent in this type of arrangement, it’s crucial to involve your lawyer and have a document drawn up that spells out everything in detail.
4. Set up a lease-to-own agreement.
Basically, you buy an investment property and rent it to your child. You can set the terms of the agreement, but here’s how lease-to-own arrangements typically work:
The renter is buying the right to purchase the house later at a given price. There’s often a large upfront option fee of 1% to 3% of the home’s purchase price. Or, the option fee can be added to the monthly rent. Usually, some or all of the option fee is credited as a down payment on the purchase of the house.
During the rental period, you still own the home and are legally responsible for it, but your child maintains the property as his or her own. Be sure to have a legally-reviewed contract signed by all parties involved.
If you’re interested in purchasing Santa Cruz real estate for your adult child or as an investment, I can help. Give me a call today at 831.662.6522 or email me at Lauren@LaurenSpencer.com for more information.
For additional information visit my website at www.MySantaCruzRealEstate.com