With real estate prices in Canada’s major cities spiralling higher, you may be wondering if investing in a condominium for your kids is a smart move. Before you make the leap, consider these issues:
Buying a condo for a minor child
There are specific issues if you buy the condo for a minor child (18 or 19, depending on the province). According to Toronto-based lawyer Martine Ordon, you’ll likely need to hold the property personally because a minor cannot enter into a legal contract. “Alternatively, you could set up a trust to hold the property for the benefit of the child,” says Ordon. “In either case, professional legal advice is a must to avoid unintended tax or other negative consequences. Keep in mind there may be significant tax issues, like capital gains or land transfer taxes, if, and when you eventually transfer the property to your child.”
Buying a condo for an adult child
According to a recent study by HSBC, more than a third of millennial home owners tapped the bank of “Mom&Dad” because the purchase exceeded their budgets. Family relationships are already complex. Consider drawing up a contract that delineates obligations and expectations. For example, if you are buying the property together, specify who is responsible for paying condo fees, taxes and other expenses. If you lend money for a down payment, set out a repayment schedule.
To protect your capital from your child’s future spouse, consider lending the money and registering a mortgage for the equity amount you’ve provided, then charge nominal interest. In the event of a marriage breakdown, this paper trail can protect your investment. In Ontario, for example, if a boyfriend or girlfriend moves in, he or she does not have property rights.
What should you buy?
“Size does matter,” says Toronto Real Estate Agent Claire-Louise Fitzpatrick. “Most lenders will not finance the purchase of a studio unit. The unit needs to have a separate bedroom.” She says that the minimum square footage requirements for most lenders is 500-square-feet, however some will make exceptions for a smaller-sized condo with a separate bedroom. With less than 20% down, rules are much stricter.
Fitzpatrick recommends that you ask yourself these questions before you buy:
- Who is your target audience?
- Is the building in a popular neighbourhood?
- How many listings are in the area?
- What are the vacancy rates?
- Is there easy access to transit?
- How do the amenities compare with those in other buildings?
- Are there development plans for the neighbourhood?
Do you want to be a landlord?
Consider the tax implications of owning a rental property. When selling, you may be subject to capital gains taxes, or, if your rental income exceeds expenses you may be subject to income tax. You’ll also have to understand provincial landlord and tenant laws. Also, factor in the time and effort in acquiring and vetting tenants and dealing with maintenance issues. These are not insignificant drawdowns on your time and energy.
The family business
After you’ve considered the financial benefits of investing in a condominium for your kids, think about how it may impact your family relationships. After all, you’ll now be in business together.