he world of work is changing, and it’s not a good idea to assume your children will enjoy safe employment with just one or two employer during their working lives.
More probably, as Hugh Mackay tells us, they will have a “patchwork” of part-time and casual engagements, with nothing like the secure tenure that typified their fathers’ and mothers’ employment experiences.
I am sure your kids are bright, and bright people tend to do well financially. But it is still not a safe bet that they will blitz their way in and out of university and then into the top echelons of the work-force. The competition is tough, and is going to get tougher.
And what about housing prices? It is fair to say that they are becoming astronomical. One can understand why children are staying home well into their mid-twenties. They have no choice: they cannot afford to leave. The entry price into the most popular suburbs is becoming too high for most people under age 40. You would be amazed how often the new home is only afforded with a bit of discrete help from grandma and grandpa. It’s just not possible otherwise, particular if there are kids in the kitchen or on the horizon.
What will housing prices be like in 20 years time? Who knows?
How will your children afford to pay these prices? Who knows?
What can you do about this? Simple. “Buy” your child a home now. It does not have to be something they will live in when they are 50. But it should be in a part of the world that has good growth prospects. You should not actually give the child the home (in fact, this is often actually a bad idea). But by doing this now you can in effect insulate your family against future home price increases and protect the next generation against the risk of runaway home prices.
If your own home is paid off or nearly paid off, and you are still earning at a reasonable clip, most of the banks will lend you a similar amount at home loan rates without any fuss or bother. Make sure the interest rate is the same as the home loan rate: the banks will often try to squeeze an extra percentage point or two here, and have been known to tell clients that they have no choice but to charge that bit extra. It’s the ‘investment loan rate.’
Space does not allow us to explain the tax maths of all this. But if it did the maths would show that a small after tax cost to mum and dad in the early years spares the child a large before tax cost in the later years. This sparing gives the child a real economic head start in life and, with a bit of luck, the child’s own efforts will amplify this head start many times over. The bottom line is that, for higher income earners, it’s almost cash-flow neutral to 100% gear a rental property if the interest rate is 5% and the rental yield is 3.5%. The tenant (with a little help from the tax office) basically pay it off for you.
Sometimes, the second and subsequent homes are owned through a family trust and the children just live in them later on while saving for their own homes and investments. This has the added advantage of protecting your children against the risk of losing assets in divorce. Remember, the divorce rate is especially high for young marriages. Residential property is a great investment for a trust (and everyone else for that matter).
This strategy works with one, two or even three children. The maths becomes a bit daunting with four or more children, but perhaps here the idea can be modified by buying the homes a few years apart or buying lower priced homes and letting the children up-grade them later under their own steam.
Or maybe just aim for half a home for each child.
Call us old-fashioned, but we think this concept is even more important for your daughters. It might be 100 years since the suffragettes, but women still do not have equal incomes or workplace opportunities. Most women have less than $40,000 of superannuation on retirement. That won’t go far. Virginia Woolf wrote about a room of one’s own as a pre-condition for gender equality. We’d change that to a home of one’s own, for each of your daughters.
You are no doubt asking: when was the best time to implement this strategy? About ten years ago. The return on residential property was 8% per year for the ten years to December 2015. (source: ASX/Russell Long Term Investing Report. You can read this report here). An investment returning 8% per annum compounding over ten years provides a total return of 116% for the period. A $400,000 home purchased in 2005 would be worth $864,000 in 2015 (including the rent received).
Of course, ten years ago was ten years ago. So, when is the next best time to start implementing the strategy?
How about right now?
General Advice Warning
The above suggestions may not be suitable to you. They contain general advice which does not take into consideration any of your personal circumstances. All strategies and information provided on this website are general advice only.
Please arrange an appointment to seek personal financial and/or taxation advice prior to acting on anything you see on this website.