Formidable real estate markets position parents to help their children at little to no cost.
My Story
My parents have always been careful stewards of resources, and it allowed them to do something incredibly important in my life.
In 2006, they gave me a financial gift — one in the low five-figure range — as a down payment on a house. I was 27 at the time.
The house was not great. It was over 100 years old and situated in a run-down neighborhood. Regular drug transactions took place in the back alley.
But it was a house. And my name was on the title.
In 2015, after a move to the west coast, a refinanced mortgage, a failed marriage, nine years of semi-successful long-distance landlording, and a recent wedding, I finally sold the home.
Once the dust had settled and I paid all related expenses, the sale netted me and my bride about $40,000. Not a huge profit, by any stretch.
But using this little chunk of change and an unsecured line of credit, we were able to squeeze our way into a detached home in suburbia.
At the outset, our equity position was awful — we actually owed more to lenders than the entire purchase price of the home. I break down those figures further in House Poor and Loving Life.
But the point is that we were in a home. We knew that with two steady incomes, we could begin the process of chipping away at our enormous mortgage while market appreciation did its work.
What this meant for us was that instead of spending the $2,000+/month that families our size spend to rent, my parents’ financial assistance was allowing us to actually build equity by paying down a mortgage instead. And in that sense, it put us on a completely different financial trajectory.
My Parents Made the Difference
What strikes me about my story is that my wife and I aren’t special. Both of us earn modest five-figure incomes, which puts us in the same company as most couples our age.
What separates our story from that of many couples is that 2006 gift from my parents. Again, we aren’t talking Donald Trump money here — we’re talking low five figures. But that act of assistance was an absolute game-changer in my life.
I’ll be grateful for it for as long as I live.
The Down Payment Savings Struggle is Real
Today, the reality for most middle-class millennials is that putting aside enough money for even a 5–10% down payment (plus associated purchasing costs) in today’s market is a daunting challenge. Even at a steady rate of $1,000/month or $12,000/year in savings, these couples are looking at consecutive years of disciplined saving in order to put even a small down payment together.
And let’s face it — with high rental prices, student loans, car payments, rising gas and grocery costs, the costs of raising children, etc. — most millennials and gen-x couples aren’t banking $1,000 month over month. Even with no-fluff, scorched earth budgets, those savings aren’t easy. To make matters worse, market prices are unpredictable and prone to sudden increases.
Some Parents May Not Realize Their Ability to Help
One person’s housing crisis is another person’s equity windfall. In markets that have experienced rapid appreciation, long-time homeowners enjoy the benefits.
Of course the tricky thing about market appreciation is that it doesn’t affect cash flow whatsoever. A $1M gain in property value doesn’t translate into any more money for groceries.
And it’s for that reason that I think many parents — and to be clear, I’m not thinking of my own parents or my in-laws here — simply don’t realize the incredible power to help that they hold.
They don’t feel rich. And in a practical, everyday kind of sense, they may not be.
But thanks to the equity in their properties, they have tremendous power to be game-changers.
The Power of a HELOC
HELOCs, or home equity lines of credit, mean that baby boomers can borrow large sums at low interest by using their own home as security.
Let’s take a fictional Bob, his wife Shirley, and their daughter Jenny as examples.
Bob and Shirley purchased a home in 1990 for $300,000. In the years since, they raised a daughter that they love very much. As little Jenny grew from toddler into young professional, Bob and Shirley used their modest incomes to pay their mortgage faithfully. Today, their mortgage principal is at $50,000.
Their home has appreciated well over the last decade. Though the numbers don’t make any sense to Bob and Shirley, the local tax assessment assigns their home a market value of $1.1M.
Bob and Shirley are sitting on over $1M in equity, but they definitely don’t feel very rich. As prices rise, they continue to spend frugally throughout the year in order to maintain a modest lifestyle and remain on a track of responsible savings and investment for retirement. These are wise and responsible goals.
What Bob and Shirley fail to see is the power of a home equity line of credit. They miss the fact that a bank would gladly lend them $30,000 at 4%, or just $1,200 in interest per year.
For just $100/month, they could give or lend $30,000 to their daughter, Jenny. And that $30k would be enough for Jenny to purchase a condo.
Not a grand place. But a toe in the market. A place to call her own.
Heck, Jenny could even pay the interest on her parents’ HELOC herself, meaning the loan wouldn’t cost Bob and Shirley anything at all. By the time she sells her first property to upgrade to her second, Jenny should net enough from the sale to pay her parents back in full.
Think about that for a second, because this is the point I’m trying hard to make.
For no cost at all, these parents could completely change the financial trajectory of their daughter’s life.
Don’t Hear Entitlement
This piece is a bold argument to make, and some will hear millennial or gen-x entitlement here (I fall into either generation category, depending on the source you go by).
Please don’t hear entitlement. I fully recognize that not every parent is in a position to do what my parents did for me. In my case, I’ll be forever and humbly grateful.
Far be it from me to tell any other person — of any age or status — how to manage their hard-earned money.
Instead, I write this piece out of a place of genuine care. Out of a genuine belief that there are families who could be multiplying their wealth generationally, but don’t understand how to do it.
I write out of the knowledge that there are professional couples out there whose parents are sitting on the means to absolutely transform the financial futures of their children at little to no cost at all. They just don’t realize it.
A Legacy Move
Of course the best part about my parents’ financial help is that one day, my wife and I will be able to help our boys out in the very same way. That makes me smile.
The help may not be a lot. And like the Jenny scenario I described above, it may be a loan instead of an outright gift.
But it will be enough to help them get into the market, something that will help not only them but their families as well.
The gift that my parents gave back in 2006 will continue to give for years and even decades to come. And that’s a powerful thought.
It makes their gift a legacy move. One that changed a family tree for generations to come.
When it comes to today’s real estate, baby boomers can be game-changers.
Tim Cavey 