Investing in real estate can be a smart way to build wealth over the long-term. One strategy that has become increasingly popular in recent years is purchasing a property in your child's name with a low down payment. This approach can offer a range of benefits, from taxes to increased financial flexibility..

The FHA has loan program that allows parents to buy their children properties with 3.5% down so long as the child is an occupant in the property, which is perfect for parents investing in a property for their child to live in during college, or move out for the first time.

Requirements for Investing in a Property in Your Child's Name

In order to qualify for this type FHA loan, your child will be the legal owner of the property; they will be responsible for all taxes and fees associated with the property, but parents are allowed to cover all costs.

It is important to note that in most cases, FHA doesn't approve applicants co-borrowing if one of the borrowers won't be occupying the property. But blood relatives - such as children (or parents if any of us are lucky enough to be buying our parents houses) qualify for co-borrowers to come up with all of the down payment & carrying costs, even if they don't live there.

Another requirement is that the property must be a single-unit property, such as a house or condo. Multi-unit properties, such as apartment buildings, are not eligible for this type of loan.

One Of The Best Strategies Available

One of the best strategies I've come across for giving your child an immediate adulthood head start is to purchase the property they move into when they move out, or go to college, with a 3.5% down payment.

Yes, buy the college house they're going to trash. Put it in their name.. and see what they do with it.

For Example;

You could purchase a 3-4 bedroom house in Berkeley, California, for ~ $1,000,000 with a 3.5% down payment & a loan of ~ $965,000.

Once you've purchased the property, your son/daughter and their friends can become tenants for $1,500/room, which is a competitive local market rate in most of Berkeley. This rental income can be used to cover the monthly mortgage payments, which would be ~ $7,800 per month

'But thats a negative carry'.. sure.. for now.

Carrying costs associated with the property will also need to be factored into the investment for a period of 12-24 months until refinancing to a lower rate is doable. Assuming that interest rates are going down like the entire media world says they will, you can refinance at a lower rate and offset some/most of that gap.

The out-of-pocket expenses for this investment would be around $35,000 for the down payment, plus ~ $2,500 carry per month for 24 months for a total of $95,000 over the first two years of ownership assuming lower rates are 24 months out.

The best part; The numbers above are specifically for one of the most expensive real estate markets in the country. You can execute this strategy in any other college town (~ minus Stanford and a few others) with a much lower monthly payment & way less liability should the property sit vacant for a period of time.

Benefits of Investing in a Property in Your Child's Name

One of the key benefits of investing in a property in your child's name is that it can offer significant tax advantages. For example, if your child is in a lower tax bracket than you, they may be able to take advantage of deductions and tax credits that you may not be eligible for with a real estate asset in their name.

But financial flexibility has to be the best benefit here. If your kid needs money after college to get started in the real world, or any other lump sum life events, they can take out a home equity loan to access the equity built in the property during college while they were living in it.

Further Thoughts..

Investing in a property in your child's name can be a smart way to build wealth over the long-term. By purchasing a single-unit property with a low down payment as their first out-of-the-nest place to live, then renting it out to them & their friends can be a great way to generate rental income that can cover the most of the monthly mortgage payments.

Obviously, it's important to carefully consider the risks and benefits before making any investment decisions. After all.... college kids are college kids.

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