It's that time of year again, when parents start looking for homes for their children to live in while attending a college or university in the Edmonton area. TD Canada Trust recently released a report showing that 10% of Canadian parents would consider buying a condo for their adult children, and our experience shows that many parents in the Edmonton area are interested in this type of investment. We've written articles on this in the past, but this time I'd like to focus on some of the financing options parents have available to them.
Many parents will fork over the down payment and have their children pay the monthly costs; this helps their children get into the real estate market and establish credit while securing an investment or retirement property for themselves. The decision many parents face is who to put on title, and how to finance the property; speaking with your accountant and lawyer prior to these decisions is a must. Here are a few pointers to keep in mind:
- If the condo is in your name, as your secondary residence you could end up paying a lot in capital gains tax when the time comes to sell (assuming it increases in value).
- If your kids are making the payments make sure they can actually afford them (plus taxes, condo fees, utilities etc).
- As with all real estate make sure you look at it as a long term investment - don't expect to make a profit after a year or two.
I asked Gord McCallum at First Foundation (an Edmonton & Calgary mortgage broker) to outline some financing options for parents and he suggested three:
- Buy it as a rental property. This requires a minimum of 20% down. The big advantage here is that the interest on the mortgage is fully tax deductible, as would be the interest on the down payment if you borrow it as well. Essentially you would be able to deduct 100% of your interest costs against your income. The downside is the treatment of capital gains tax. Again, your accountant should be consulted to help make this decision.
- Co-sign the loan. Have your kid(s) on title as the principal buyer(s) and you as a co-signor. The property is considered a principal residence and not a revenue property, so the interest is not deductible and you should not face any capital gains tax. The main reason someone might pursue this strategy is if they prefer to be more highly leveraged and put as little as 5% down (which would also mean you have to pay CMHC insurance premiums).
- Purchase it yourself. The CMHC "second home mortgage" program allows you to purchase it yourself with as little as 5% down. Your children don't need to be on title but do have to live in the property. In addition you are not allowed to generate any revenue from the property (i.e. a roommate) as per the terms of the program.
All of this brings up estate issues as well which can get quite complicated, especially if you have more than one child... one more reason to consult both your lawyer and your accountant before signing on the dotted line.
If you're looking for a condo for your kids we've created a list of all the condos for sale near the University of Alberta.