HomeNewsAustraliaWhy investing in property can fast track your child’s financial future

Why investing in property can fast track your child’s financial future

As a parent, one of the greatest practical gifts you can give your children is empowering them to be successful through education about financial matters. Initially this should include building up savings and teaching them how compounding works. As they grow into young adults discuss the various ways they can get ahead in life, including the possibility of investing in property – either a home or an investment property, or both!

Investing in property is largely seen as a safe way to build wealth, but it is a long term strategy. The younger you start, the more effective it is, thanks to leverage (borrowing from a bank) and the power of compounding (time). For example, if you acquire a property for $500K at age 20 and it grows by a conservative 5% per annum, it will pretty much double in value to $1 million by the time you are 35. How many people have $500K of equity at this young age? And by age 50, it will be worth 4 times what you paid for it, at $2 million.  If capital growth is 7%, then the property will double in value every 10 years, thus accelerating your equity build-up dramatically.

If well researched, and with the right advice, a property can be cash flow neutral or positive in the current market, and may become slightly cash flow negative if interest goes up far enough but, overall, should remain quite manageable.

If you acquire several properties over time, imagine the amount of equity you can build up by the time you retire! The difficulty is the starting point, as young people rarely have enough deposit for a first property.

As a parent there are many ways you can help your children kick-start their wealth creation through property. Here are a few:

Offer to be a security guarantor for the deposit.

You can be a guarantor for the deposit on a property purchase, being owner occupied or an investment. This involves giving the bank a mortgage over your own home for a portion of the purchase, usually limited to the 20% deposit on the property. You would then be responsible for the repayment of the 20% deposit only. The bank will want you to be able to service this loan on your own, so that you are not in danger of losing your home. Obviously, you would insist that your child focuses on repaying your loan first, and have confidence in their ability to hold a job and repay the debt you have contracted on his/her behalf…

Use your savings to help with the deposit.

If you have sufficient savings, you could offer to donate the value of the deposit. Most people rationalise this gift as being “an advance on inheritance”. It’s fine, if you can afford to do it, although there is an argument that you are spoiling your child and not teaching them the value of money.

An alternative is to “lend” the deposit rather than “gifting” it. This involves an agreed repayment schedule, but don’t hold your breath, you will be the last ranked creditor in your child’s books if things go wrong. After all you are most unlikely to sue, especially when you have no security to back up your loan.

Co-invest with your child.

This is a controversial one. It will certainly help your child get on the property ladder, but if you co-invest you are then “jointly and severally liable” for the debt, meaning that if your child does not repay the loan, you will have to.

Create your own portfolio of properties.

This is about building up wealth yourself with a view to eventually helping your children. This way you keep control of how you pass it on to your child. Obviously you need to start as early as possible so that you are financially prepared when the time is right.

To summarise, whichever way you chose to help your offspring, it is wise to keep some form of control over how you provide financial assistance but, whatever you decide, it’s always good if you can help kick-start their journey!

Source: Multifocus Properties and Finance/Philippe Brach

Philippe 1

Philippe Brach, CEO Multifocus Properties and Finance, is the author of ‘Creating Property Wealth in any Market’.

With his 25 year background in corporate finance and accounting, as well as his experience as a property investor, real estate agent and finance broker, he has turned his passion for property into a unique investor-focused business.

He works with those new to investing – looking at building a property portfolio – as well as experienced investors considering their next step. Visit www.multifocus.com.au or call 1300 266 350.

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