If you’re a parent paying your child’s rent, pay close attention to this post. (If you’re that child, read carefully as well and pass it on to your parents.) The NYT recently ran an article on an increase in the number of parents buying for their children. Normally we would speak about this to sellers, but we’re writing for those renters among you.
The rental market is only getting stronger, and it’s doing so at a faster clip than the sales market is improving (10% increases year on year vs. low single digits in housing price increases). This creates your typical arbitrage situation which, when coupled with historically low rates, begins to make a very solid case for purchasing for the long-term.
Let’s say your child is about to go to college in the city, or is about to start his/her first job. Unless there’s some serious transition that takes place in the near future, we’re talking at least 4-6 years of living in the city and shelling out rent with no return. Even if you consider a studio apartment (the case gets even stronger with a 1-bedroom), we’re talking at least $2k/month for a modest studio apartment, which adds up to $24k/year, or $96k-$144k over this time period … that’s the equivalent of $120k-$180k worth of pre-tax credit mortgage payments. For $400k-$500k, you could purchase that same studio and have residual rental income long after your child has moved on.
Furthermore, particularly if you’re paying the rent on behalf of your children, your rental efforts do nothing to help them build their credit or instill a sense of fiscal discipline. Instead, you could co-purchase that studio such that your children benefit from the timely payment. Further, they can be involved in the purchase and sale decision, giving them a head start in learning to make sound financial decisions. Better yet, if you opt for a one bedroom, your child could take in a room-mate and begin reaping the rewards of residual income immediately. It’s never too early to help your children learn financial discipline and responsibility, in a way that directly involves them in the process.