Buying properties for school-aged kids comes with pitfalls, experts warn
Tuesday Dec 26th, 2017Share
Jennifer Johnson felt she didn't have time to wait. The single mom of two children, she watched as house prices in her Ajax, Ont., neighbourhood soared year after year.
"When houses were starting to go up 20 per cent each year, I was worried about my kids' futures," says Ms. Johnson, a global bid manager and proposal writer.
So, in 2014, with her own house paid off, she decided to take the real estate plunge again, buying her son, Braden, then 10, a home in Ajax for $410,000. In 2015, she purchased a $430,000 home in Brooklin, Ont., for her daughter, Sydney, then 12.
Having made 20-per-cent down payments on both mortgages, Ms. Johnson, 50, finances the properties by renting both out for a total of $4,200 a month. She says the arrangement costs her an additional $1,000 out of pocket monthly.
The decision to buy homes for her kids has meant that Ms. Johnson has had to cut back on expenses. "We never eat out," she says. "We buy a lot of our things from Value Village. My car is 14 years old and has 390,000 kilometres on it. But I'm okay with it." She has also had to hire local contractors to maintain the properties and to search out tenants, a process she concedes can be stressful. But having found two families who plan to stay long-term, she's less concerned about tenant turnover. Plus, she's encouraged by the vacancy rate, which in Toronto was 1.1 per cent this past fall, according to Canada Mortgage and Housing Corp.
Despite the huge debt load and the uncertainty of the real estate market, Ms. Johnson feels she's made the right decision. Over the past two years, "[the properties] have doubled in price," she says. For the process of eventually transferring ownership, she says that once the homes are paid off, she will rent them to her kids to ensure the homes aren't split up in the event of divorce – and then pass them on as her inheritance.
"This is an investment I'm making in my kids' futures," Ms. Johnson says.
At a time when real estate markets in cities such as Vancouver and Toronto, as well as Hamilton and Victoria, show no significant signs of cooling, middle- and upper-class parents such as Ms. Johnson are buying properties for their young kids, recognizing that if things continue unabated, their children could be shut out of the market long before they reach adulthood.
In the Greater Toronto Area, the benchmark home price in November, 2017, was $744,700, while in Greater Vancouver, it was $1,046,900, according to the Canadian Real Estate Association. "The consensus is that real estate prices are going to increase," says Mike Stewart, a Vancouver real estate specialist. "There are a lot more people concerned about affordability." Carl Langschmidt, president of condos.ca, says many of his clients are panicking about the market. They're saying, "How the hell will kids be able to buy a place?'" he says. "'How are they going to get on the ladder?'"
Mr. Stewart says many of his middle- and upper-class clients are buying condos for their children in the presale phase. "A parent can put down a deposit on a property that is two-three years from completion," he says. "So there is no effect on their credit room. They can buy the presales and then they wait, then get the mortgage and pay the rest of the down payment. We see a lot of people doing that."
Brad Lamb, president of Brad J. Lamb Realty & Lamb Development Corp., says the same trend is playing out in Toronto. "People are in some cases buying three apartments – one for each kid in different buildings. When they get old enough, they can choose to sell it or live in it – but at least they have their toehold in the market. It's happening a lot."
Mr. Lamb says he recently bought his five-year-old a condo. "It's 800 square feet – I paid around $450,000," he says. "When she's 20 in 15 years, that will probably be worth $3-million."
Mr. Lamb says the apartment can rent for $2,500 a month. Fifteen years from now with rent increases, he foresees "$2,000, $3,000 per month in pure profit, plus a very small mortgage to pay off."
Beth Title, the managing director of a personnel firm, has been weighing purchasing two condos for her kids and has discussed the issue with her financial adviser. "It's very scary when you think about what housing costs have done in the past couple of years," she says. "I suspect my children will not be in the same advantageous position as I was when they go to buy a house."
What's holding Ms. Title back are the costs above and beyond the rent that such a property would bring in – a figure she suspects could be around $15,000 annually. "I would certainly believe that we would see our money out of the investment," Ms. Title says. "But the reality is, [for] most condos, when you look at the profitability, it is net negative over the next however many years. Who is coughing up the money for any improvements that need to be made, your insurance, and also your condo fees? That's coming out of pocket."
"I think it's a crazy idea," says Susan Latremoille, director of wealth management and wealth adviser at the Latremoille Group and Richardson Group GMP in Toronto. "I would not advise my clients to do it."
Ms. Latremoille says that if parents already own their own home, they will have to pay a capital-gains tax should they decide they need to sell the additional property, as they can't put the children's names on the property title unless they are adults.
She also feels that rising interest rates may severely affect mortgage payments, especially if a parent is carrying more than one. Plus, she says the real estate market may fail to continue its upward trajectory, leading parents to sell the property at a loss. "You're speculating on where the housing market will be in a decade or more," she says. Ms. Latremoille suggests would-be buyers consider their children's education costs, as well as their retirement income, before leaping into real estate purchases for their children. "This is just an extension of helicopter parenting. Get them a good education and set them free," she says.