Parents: How to buy a home with your adult children

Today’s housing market is marked by low inventory, high prices, and older generations sitting on a lifetime of cash, which continues to put homeownership out of reach for many Millennials. With student loan debt, sluggish wage increases, and the high cost of rent, many younger generations feel like they’re priced out of homeownership. It seems impossible to achieve the American dream on their own.

Enter: cobuying.

Many parents and adult children are partnering as another option to help the younger generation own property – especially in some of the United States’ high-priced markets. One of the most frequent scenarios we see is parents helping their children with the down payment, and the children then cover the mortgage payments. Tackling this large expense makes homeownership more affordable.

Whether it’s for financial reasons or another reason, it’s important to know what’s involved when parents and a child cobuy a home. There are different ways to approach a home purchase, and the right one will depend on your financial situation. We’ll share some of the most asked questions, as well as the benefits of parents cobuying with their children. But, as always, advise an attorney and/or tax professional for advice on your specific situation.

Why is cobuying on the rise for families?

In late 2021, a National Association of Realtors (NAR) report showed that the median age of first-time homebuyers crept up to 33 years old, from 28 years old back in 1991. Additionally, the median age for repeat buyers is now 56 years old – the highest it has ever been.

NAR states, “The demographics of homebuyers continued to shift over the last several years due to both tightened credit conditions and the lack of inventory on the market, which are driving up home sales prices.”

The increasing unaffordability of homeownership has left many prospective homeowners, especially those in the Millennial generation, to look for alternative solutions. Many who feel priced out of owning a home are joining up with family members or friends to cobuy a home.

It’s then no surprise that data shows that between 3-7% of all home purchases involve family members or friends buying together—and this percentage continues to grow year-over-year.

Can you get a mortgage with a parent or adult child?

Yes, you can get a mortgage with your adult child. Adult children often choose this approach because it makes it easier to qualify for a loan.

You and your adult child can combine your income and debts to improve your debt-to-income ratio—so long as you both have good credit scores. The lender will review each of your credit reports and use the lowest median credit score to determine if, or how much, you’ll qualify for a mortgage.

How does co-ownership work?

The process is different for a parent and adult child than it is for a married couple. Cobuying a home can be structured in one of a few different ways, with establishing an LLC being the most common.

Property LLC

Most cobuyers purchase a property using an LLC structure, which provides numerous benefits and advantages, from taxation to litigation and more. It allows you to deduct your rental expenses from any income you earn as well as property taxes, repair and maintenance costs, property management costs and more–all of which save you money at tax time.

Joint Tenancy

When buying a home with your child using this option, each person will have equal ownership of the home, regardless of how much each person invested. If one of the owners passes away, their share of ownership automatically passes to the surviving co-owner.

Tenancy in Common

Unlike joint tenancy, shares of the property are not divided equally between the owners. Instead, each person’s share of ownership is equal to how much money they invested in the property. Let’s pretend a father and adult son cobuy a home. The father owns 80% of the property, while the adult son owns 20%. Despite the difference in percentage owned, both have a claim on the property.

By holding this type of title, you can sell or transfer your share in the property to another person at any time without needing to receive co-owner approval.

Benefits of parents and adult children cobuying a home

Whether it is your adult child’s first home or you want to buy a vacation home together for passive income, cobuying comes with many advantages.

1) Better mortgage terms

In the early 2000s, almost anyone was getting approved for mortgages. Now, however, mortgage lenders have made it more difficult to qualify.

By pooling income and savings, you and your child have a better chance of not only getting approved but obtaining a lower interest rate.

2) Splitting costs

Maintaining mortgage payments, utilities, and property upkeep are downright expensive. When parents and children buy a home together, these expenses can be split, making home ownership more affordable. Whether it’s a bigger home, a home in a better location, or a more modern home, pooling resources can make it possible.

Helping your child become a homeowner sooner

Let’s face it. Many Millennials are tired of paying their landlord’s mortgage. With some rents as high as – if not higher than – mortgages, purchasing a property together can allow your adult child to become a homeowner earlier in life than they’d otherwise be able to.

What does this mean? It means they’ll benefit from equity, tax benefits, and a fixed monthly cost versus the volatility of landlords and more.

4) Gaining passive income

If you’re buying an investment property or a vacation home, you can ultimately gain passive income by renting out the property on Airbnb or Vrbo. As more people become untethered from the office, it is accelerating demand for both short- and long-term rentals.

Today’s real estate market is more competitive than it has ever been. It is also more challenging than ever for Millennials, especially, to buy their first home. Parents and adult children cobuying a home may be just the solution needed to overcome these challenges.

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Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.