OH! Magazine - Australian Version January 2018 | Page 22

( CHA CHING )
HOW TO FAST-TRACK YOUR
CHILDREN'S
FINANCIAL FUTURE
Philippe Brach explains how property investment can benefit your kids.
s a parent, one of the greatest
practical gifts you can give your
children is empowering them to be
successful through education about
financial matters. Initially, this should
include building up savings and teaching
them how compounding works. As they
grow into young adults discuss the various
ways they can get ahead in life, including
the possibility of investing in property –
either a home or an investment property, or
both.
A
Investing in property is largely seen as a
safe way to build wealth, but it is a long
term strategy. The younger you start, the
more effective it is, thanks to leverage
(borrowing from a bank) and the power of
compounding (time). For example, if you
acquire a property for $500K at age 20
and it grows by a conservative five per cent
per annum, it will pretty much double by
the time you are 35, to $1 million. How
many people have $500K of equity at this
young age? And by age 50, it will be worth
four times what you paid for it at $2
million. If capital growth is seven per cent
then the property will double in value every
10 years, thus dramatically accelerating
your equity build-up.
If well researched, and with the right
advice, a property can be cash flow neutral
or positive in the current market, and may
become slightly cash flow negative if
interest goes up far enough; but overall, it
should remain quite manageable.
If you acquire several properties over time,
imagine the amount of equity you can
build up by the time you retire! The
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OH! MAGAZINE ( JANUARY 2018 )
difficulty is the starting point, as young
people rarely have enough deposit for a
first property. As a parent there are many
ways you can help your children kickstart
their wealth creation through property.
Here are a few: creditor in your child’s books if things go
wrong. After all, you are most unlikely to
sue, especially when you have no security
to back up your loan.
Offer to be a security guarantor for the deposit This is a controversial one. It will certainly
help your child get on the property ladder,
but if you co-invest you are then 'jointly
and severally liable' for the debt, meaning
that if your child does not repay the loan,
you will have to.
You can be a guarantor for the deposit on a
property purchase, being owner occupied
or an investment. This involves giving the
bank a mortgage over your own home for a
portion of the purchase, usually limited to
the 20 per cent deposit on the property.
You would then be responsible for the
repayment of the 20 per cent deposit only.
The bank will want you to be able to service
this loan on your own, so that you are not in
danger of losing your home. Obviously, you
would insist that your child focuses on
repaying your loan first! To go down this
road you need to have confidence in your
child’s ability to hold a job and repay the
debt you have contracted on his/her behalf.
Use your savings to help with the deposit
If you are lucky enough to have sufficient
savings, you could offer to donate the value
of the deposit. Most people rationalise this
gift as being 'an advance on inheritance'.
It’s fine if you can afford to do it, although
there is an argument that you are spoiling
your child and not teaching him/her the
value of money.
An alternative is to 'lend' the deposit rather
than 'gifting' it. This involves an agreed
repayment schedule, but don’t hold your
breath, as you will be the last ranked
Co-invest with your child
Create your own portfolio of properties
This is about building up wealth yourself
with a view to eventually helping your
children. This way you keep control of how
you pass it on to your child. Obviously you
need to start as early as possible so that
you are financially prepared when the time
is right.
Whichever way you chose to help your
offspring, it is wise to keep some form of
control over how you provide financial
assistance. However, whatever you decide,
it’s always good if you can help kickstart
their journey!
Philippe Brach
Philippe is the CEO of Multifocus Properties
and Finance, and an experienced property
investment specialist, finance broker and
author of Creating Property Wealth in any
Market. To find out how Philippe and his
team can help you with your property
investment goals call 1300 266 350 or
visit www.multifocus.com.au