It’s a family affair: Helping the young into their first home
Home ownership is one of the most tried and tested ways to build wealth over time. Real estate appreciates over time, especially in Hawaii, where housing prices have increased 6 percent annually on average over the last 35 years.
Today however, with prices climbing and stiff competition due to low inventory and a large pool of buyers, young people are finding it harder to get into their first home.
The primary challenge they face may not be in securing a loan, as it once was, but coming up with the money needed for a down payment.
“Many young people have a solid income and can qualify for a mortgage, but they just don’t have the cash for the down payment,” says Jon Yamasato, Realtor and partner at Prudential Locations.
With the market moving faster than most people can save, some parents and other family members are lending a hand to help out their young relatives take advantage of today’s interest rates and prices.
DOWN PAYMENTS: GIFTS OR LOANS
Financial assistance isn’t only the purview of the wealthy or those with large savings. Families of modest means have found creative ways to realize cash for a down
payment. Yamasato has seen parents refinance their home or investment property, then take out some of the earned equity to give to their children for a down payment.
There are tax and other implications for down payments received as a gift versus a loan. An individual can give up to $14,000 each year tax-free to another individual. So, a set of parents can give up to $56,000 to a young couple in a tax year, tax-free.
If money is provided as a loan, however, it should be documented. It will be taken into account by the lender as an additional debt that the buyer has, alongside car payments, credit cards and other types of debts.
BUYING A MULTI-FAMILY PROPERTY
Hawaii is known for valuing ohana and, not surprisingly, has a higher-proportion of multi-family properties than many other places. “It’s not uncommon for siblings or other family members to buy into a property together, and then have multiple family members live on that property,” Yamasato says.
Parents with the ability to purchase a property can make a rent-to-own arrangement with their children, in which rent payments are credited toward the eventual purchase of the property. This type of arrangement requires consultation with a tax professional as well as a lender, and must include a written contract.
Family members often don’t realize the impact their attitudes and advice can have on young people who are considering buying their first home.
“A parent or elder’s encouragement can make a big difference,” Yamasato says. “I’ve seen family come in and say ‘don’t buy this, it’s too expensive,’ but they bought their home 20 years ago and haven’t followed the market. It’s important to realize that young people put a lot of stock in what their elders say. Making sure children have the best professional advice can help them make good decisions.”
MAKING A FIXER-UPPER POSSIBLE
Family members’ time and skills can make a first home possible by helping out on the back-end. Yamasato describes how some of his young clients have been able to buy affordable fixer-uppers that needed a lot of work, because “some very handy fathers were committed to coming in after the purchase to help their kids fix up their places.”
HELPING THEM SAVE
Depending on family relationships and the set-up of their homes, some parents have offered to house their grown children so that what would be spent on rent each month can be saved for a down payment.
Yamasato points out that a first home doesn’t have to be forever: “Your first home is a first step. It’s about getting your toe in the door, building equity, and moving up as your life moves forward. If you don’t have any skin in the game, when the market goes up, it’s very hard to catch up. So the key is to get in, then let time and the market grow your investment.”