Getting (young) children into the property market

[esawers]

I see this is becoming more common, buying a house for a child and renting it out until they are legally allowed to own property.

Has anyone done this before? Can you tell me how it worked? What is the best way of going about it legally/financially/tax obligations?

Does the house go under their name, or our names?
Is the mortgage under their name, with us as guarantors?
How does tax work if the house belongs to them? They have no other income.

Is it better being bought under a trust that dissolves when they are 25 or similar?

We are meeting with the bank to discuss and they will probably have some advice.

Any hints on the kids not feeling spoilt and entitled with this system?

[Keithw]

This is something that has been on my mind recently with the soaring prices, and with older kids currently overseas wanting to come home and have a place of their own.
There are so many things that affect how you go about it.
Your personal circumstances
The age of the kids - working or not
The type of property you are thinking of
The location of the property
How much rent it will bring in & therefore whether you are going to have to subsidise it or not (ie negatively geared, not just gauranteed by you.)
How the banks will allow it to be financed. ie Trust, in your name, in their name, LTC, Normal Company, partnership.
How much can be borrowed for its purchase - is it an owner occupied place (80% funding) or is it investment (60% funding)
Will it affect any first home buyers grant eligability, or prevent the use of kiwisaver funds.


Some ways it can be done and things to consider:
Trust:
most likely needs to be secured by your personal assets.
if negatively geared, cannot pass losses to anyone, so losses must be held in the trust until it starts making money.
probably no need to have it auto dissolve, just make sure it is written to have the ability to dissolve at will.
Probably no need to have the trust hand over property at 25 since it is probably safer in the trust than in childs name, except if it is still neagtively geared at that point, they cant take advantage of tax offset. If positively geared, the trust can pay out trust income to kids and they will be taxed at their tax rate rather than the trust tax rate.

Look Through Company LTC
tax losses can be passed through to shareholders in proportion of share holdings.
shareholdings can be changed easily- no need to sell property or company.
may start with kids as 1% shareholders & you as 99% so you can cover tax losses until such time as property is profitable
Disadvantage- no asset protection- you are liable for the company, and the company assets are seen as yours (Look Through), so should you be sued, or divorce, then those assets get dragged into proceedings.
For me this is probably the most likely way my kids will become investment property owners, taking over what I have built up, although once positively geared it may be that a Trust is the better option, or the LTC is converted to a normal company.


Buy in their name
Not sure how banks look at financing that, but certainly would be gauranteed by you.
Also not sure if there is an age limit on children being able to own a property - you hear stories of peoples dogs being signed up to things like cars, not sure if that extends to property.

Partnership - you & Kids
much the same as LTC
not sure at what age someone is legally able to be in a partnership

There are probably many other ways to structure property for the kids, but as you can see you need to consider a lot of factors before jumping in.

Let us know what feedback you get from the bank.

[Keys]

Give the man a fish. He'll be hungry tomorrow.


Teach him to fish, he'll feed his family.

[Wayne]

Give the man a fish. He'll be hungry tomorrow.


Teach him to fish, he'll feed his family.

This is my approach with the kids.
At some stage they will want some money but they have to prove they are ready for it and they know not to expect it.

[PTILoveYou]

Give your kids a copy of Rich Dad Poor Dad book at their birthday, every birthday, until they read it and understand it.

[Judge]

Give your kids a copy of Rich Dad Poor Dad book at their birthday, every birthday, until they read it and understand it.

I rarely agree with what Gary has to say on this forum, but I certainly agree with this statement. It's hard for kids to understand the message in this book as they have not experienced the rat race, but the earlier they get the message the better, no doubt.

[Bobsyouruncle]

Don't give them a bean till they're 35, so they learn what the real world is like.
Simplest way to do it surely is to make the child a shareholder in the company that holds the property and once they are 18 or more they can become the director and only shareholder. This avoids any conveyancing.

[Keys]

Don't give them a bean till they're 35, so they learn what the real world is like.

Did you move to a good area to get them into a good school? Did you give them any assistance in any sporting or extra carricular activity? Just interested in those who won't help their kids financially and yet move mountains to get them a "good" education.

[Nick G]

I think there are two questions -

a) Should you do it?
b) How would you do it logistically?

I think OP was asking the latter. Most of us would have similar ideas on the former, PI's tend to be self starters as a rule.

[Bobsyouruncle]

Hey Keys, I was actually quoting my accountant but the sentiment is not to give them large amounts of money when they are young. I would happily help any of my kids into their own homes and have tried twice. Sadly my Gen y'ers are week to week instant gratificationers so I have given up trying to talk them into ownership for now.
In keeping with my accountants advice we have done loans for cars and other things but always with paperwork and security. One of my kids in particular has really grown up financially through those steps it was good education for them.

Personally I think it's quite hard to know what is best to do with ones kids. My experience with my parents was they let my siblings and I use their home as equity for loans at times, which helped a great deal. However in their old age they were fairly broke and relied on us for assistance.
My intention with my kids is to leave them at least 2 homes each in the USA, and they can hope I don't sell up and spend the rest in NZ. It was more of an issue before I fell over in the GFC so the numbers are much less exciting for them now :-).

[Bobsyouruncle]

I think there are two questions -

a) Should you do it?
b) How would you do it logistically?

I think OP was asking the latter. Most of us would have similar ideas on the former, PI's tend to be self starters as a rule.

Agree. As I said shareholder from day 1 is simplest I believe.

[Connor]

Did you move to a good area to get them into a good school? Did you give them any assistance in any sporting or extra carricular activity? Just interested in those who won't help their kids financially and yet move mountains to get them a "good" education.

Not helping them too much financially is part of that education.

[Nick G]

Keys, it sounds like you're asking about improving the quality (maybe, as the son of teachers I have doubts) of something they'll get anyway, schooling and comparing that advantage with giving kids a financial head start without a financial education. If that's the case they're two different things.