Josh Masters, Buyers Agent at Buyside explains five property investing mistakes to avoid as a parent.
What if they can’t get in to the market?
What if they can never afford a property?
What if they have to rent for their whole lives?
Having recently interviewed a number of our top clients to really understand what was driving them to invest in property, many stated clearly that it was about their children and the fear that they may never be able to get a foothold.
While many of our clients were investing in property to supplement their future income in retirement, almost all of them stated that they wanted to pass something on to the kids, not just as a gift, but to give them a leg up into a market that may one day be seriously out of reach without some assistance.
Having had my first child only last year, I know how it feels to want to provide for the family. You don’t want to hand them their life on a silver platter and not appreciate it, but you also want to provide them with the resources that will at least give them the freedom to choose and to create a great life for themselves.
Admittedly, while parents want to help their children, that doesn’t always mean a handout. Some are happy to gift their children an investment when they come of age while others seem more inclined to pass on enough equity to provide them with the deposit they needed and have the children make the repayments.
Either way, for those parents who are considering investing in the market with their kids in mind, here are 5 of the top mistakes that you should try and avoid when investing for the offspring.
1. Buying it to live in
Despite your undying wishes to have your children live out their lives as close to you as possible, there’s a good chance that by the time they get old enough to leave home the last thing they will want to do is live in the same neighbourhood as you (which is invariably where you will probably try to buy). They will probably not even go to the school or university you think they will go to (if it’s still there) and they may not even want to live in the same city or country.
So do your child a favour and rather than think of the property as a place to move them in to, try thinking about whether it will grow in value and attract a good tenant. They’ll definitely thank you for that.
2. Not thinking about affordability
While you may want to buy in the areas you know because, well, you know them, they may not be affordable for your kids to own if, and when, you pass the property on.
You don’t want to force your kids to work day and night shifts at the local restaurant just to make the repayments. Keep the purchase price at a level where, if you wanted to hand over the reigns on the mortgage and teach them some responsibility, then it would be financially possible to do so.
3. Not focused on quality
The worst thing you could do to your children to turn them off investing for life is to give them a property that is more trouble than it’s worth.
It’s one thing to try and make repayments responsibly, but if you have the tenant from hell or a property in such a state that you could push it over in a light wind, they will only be discouraged to buy another one.
A property in any area will have a good pocket and a bad pocket regardless of price. Make sure you stick to the good pocket if you want to encourage them to buy again.
4. Chasing yield rather than growth
While it can be admirable to want to have them focus on getting a little extra cash in their pocket from an investment, the beauty of having youth on their side is that the power of compounding works so well.
Invest in an area that has a solid, long-term growth rate and while it may cost them a few hundred dollars a month to maintain, they’ll get that back in spades when they realize how much the property has risen in value. This will make it so much easier for them when it comes to stumping up a deposit on the next property – it’s the perfect leg-up that kids need to get into the market successfully.
5. Not looking at the long-term
If you play your cards right then the property you decide to hold in trust for your kids may be with them for decades. Because of this you need to take a long-term view on the purchase.
You want to make sure that you’re not buying in an area because it’s in the latest and greatest ‘hotspot’, but one that has solid, stable and consistent growth over time. It needs to be something dependable, so choose wisely and stay away from anything that glitters.
As a parent it’s natural to want to make some sacrifices for your children in order to give them a better life, but sometimes it more beneficial for them to measure the actions of the heart with the head. Think long-term and be realistic about your expectations and the responsibilities you’re hoping to pass on to them and you may set them up with some great life lessons in years to come.
Choose the right investment for both your needs
Purchasing an investment property can be a confusing, stressful and time-consuming process. This is where an expert property consultant can assist. If you need help choosing and purchasing the right investment for you and your children, please contact us for an introduction to Josh Masters.