Net Worth and Home Ownership

It starts at home.  Home ownership is a cultural mainstay of personal finance in the U.S.  The home is often the largest asset we see on a balance sheet of a moderately wealthy family.  Unfortunately, recent appreciation in the housing market coupled with increased interest rates is causing declining housing affordability for 1st time home buyers.

While current homeowners benefit from increasing prices, new buyers are often priced out of the market.  This can have a major impact on their finances and the broader community as they rent, instead of buy.  Waiting until there is a market correction, or until a child has the resources to purchase a residence on their own, can delay this important first step to building wealth.

Key Benefits of Home Ownership

For children who desire to stay in a community for five years or more, home ownership has significant advantages to renting, including:

  • Equity Building. Each mortgage payment reduces the outstanding principal owed.
  • Tax Benefits. Deductions for mortgage interest and property taxes can reduce their income tax burden.
  • Payment Stability. Homeownership provides predictable payments (if on a fixed-rate mortgage), unlike rent that may increase over time.
  • Appreciation Potential. Real estate often appreciates in value, boosting your child’s net worth.
  • Equity in the home can be used to obtain third-party financing on business or professional loans

Renting offers flexibility but doesn’t contribute to building equity. For your children, helping them understand the pros and cons of renting vs. owning and how home ownership can impact their long term financial health is essential.

What Else Can You Do?

If a child is ready for home ownership, you can assist them.   We recommend working with your financial advisor to see what is possible, but here are few ideas to assist your children with the purchase of their first residence:

  • Purchase and Bequest. Purchase the residence yourself and allocate it to them upon your death.
  • Down Payment Assistance. Helping with a down payment can make homeownership more accessible.
  • Mortgage Payment Assistance.  Similarly, helping with the mortgage for the first couple years will assist the child transition to home ownership.
  • Fund Improvements.  Children may not have the resources to make necessary improvements to a house they can afford.  Funding these projects will increase their commitment to the residence and the value of the property if they choose to sell.
  • Loan.  Be the bank and loan the money to purchase the residence, taking a security interest just like a bank would.
  • Leave Assets in a Trust: A trust can be structured to own the residence or funds for a future home purchase.

What Should You Consider?

Just because home ownership would benefit your child, assisting them financially is not for everyone.  Before committing to assist your child with a residence consider:

  • Do you have sufficient capital and resources for your life?
  • Do you desire to make your children wealthy?
  • What is the impact on other family members not receiving assistance?
  • What do your children need and are they fiscally responsible?
  • Is your estate taxable and is the asset’s value expected to increase, decrease or stay stable?
  • What should be given, the asset or cash?
  • If making a gift, can the gift be structured to minimize estate and gift taxes?

Net worth and homeownership are closely connected. By helping your children understand and leverage homeownership, you can set them up for long-term financial security. Whether encouraging financial literacy, assisting with a down payment, or structuring a more significant gift to assist them purchase a home, your support can make a significant impact on your children’s financial future.

If you want to discuss your alternatives, please give us a call and schedule an appointment.  Your children will appreciate it!