I live in the Atlanta area. I have three older kids in their early 20s, and I’m considering buying a small and relatively inexpensive piece of real estate for them to get them started with homeownership.
The reason I’m thinking about this is the abundance of homes, the extremely low interest rates, and the low prices.
Nevertheless, I have some concerns. On one of your recent radio shows, you explained that you believe another recession may occur and that we should prepare ourselves for it. The next issue I have is finding a reputable buying agent to work with the banks that have foreclosed properties and know short sales. Finally, what is the best way to take title to the property, since my kids can’t obtain financing on their own?
First, thanks for listening to the radio show. We’re glad you enjoy it and that you are thinking about investments you can make with and for your children.
We do believe we may be heading toward another recession. We might be able to avoid it, but we seem to be leaning that way. Even if we don’t have an official recession, much of the country feels as though it never got out of the last recession, so we may instead see years of slow economic growth.
You are generous to work with your kids to introduce them to real estate. You need to decide if your help will be in the form of a gift or in the form of a joint investment.
This is important: You truly need to differentiate these concepts. If you give properties to your children as gifts, they will likely expect that they have absolute control over the investment, and you will not share in the upside potential of the properties. Your kids may also make decisions about the properties that you do not like.
If you decide to invest with your kids, make sure you set up a partnership type document that describes what duties and responsibilities each person will have and how profits and losses will be allocated. You need to outline the investment plan, and all parties should know how major decisions will be made and who will have the ultimate authority to make them.
These choices are important to make (and put in writing) to keep everybody aware of how the investment will work. You don’t want to get into a situation where you feel you are investing with your kids but they feel that you gave them a gift.
If you proceed with your children to buy properties as investments, make sure you find the right ones. Georgia was hit hard during the real estate crash and recession. Now may be a good time to buy property in certain markets, as prices have stabilized.
You should look for properties that need some work, in neighborhoods that are quite stable, and where renters are looking to live. It’s fine to think you will make money by buying distressed property in an area of town hard hit by the recession, but if you buy it, you need a way to make money from it. If you can’t rent or sell it, your investment decision will have been a poor one.
You want to find real estate investments that you and each of your children can handle easily. The properties should be nearby, and you and your kids should be willing to put some time and effort into managing and improving them.
As we say in real estate, the three most important things are location, location, location. It’s very important to find a good real estate broker who knows your target neighborhoods. Ask friends, neighbors and other real estate professionals for recommendations. Some real estate agents are better in some neighborhoods than others. An agent may be otherwise great, but he or she will be much less useful without any familiarity with the area where you want to invest. The agent should also have a personality that fits well with yours and needs to have worked on a fair number of distressed properties in the past, if you are looking to buy foreclosures and short sales.
As we have said, we might be heading into tough economic times in the near future, but you should be buying real estate for the long term. If you plan to flip the property for a quick buck, you might want to consider a different type of investment.
Finally, if you plan to invest with your kids, you might want to take title of the homes with your kids. If you have a financial estate that you are looking to protect, discuss this with a financial planner, if you have one. Some investors elect to hold title in the name of a corporation or company; however, this form of ownership may limit your choice of lenders and the kinds of financing you can get.
Even if you intend to buy properties for investment purposes, your kids may want to live in some of them. In this situation, you and your kids might be better off holding title in your own names.
Once you decide the manner in which you plan to invest with your kids, consult a real estate attorney about your plans and your options for holding title to the properties. In any case, make sure you have a good umbrella insurance policy with a high limit to cover you and your properties. No matter how you hold title, insurance will be key to protecting you from problems that can come up when you invest in real estate.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce’s radio show toll-free (800-972-8255) any Sunday from 11 a.m. to 1 p.m. Contact Ilyce and Sam through her Web site, www.thinkglink.com .