12 Jul Should I buy a condo for my child to rent from me?

Q. My oldest child is financially independent and the other two are still in college. I’m hopeful they will also be independent. I’m thinking of buying a condo for the oldest that she could rent from me, but I don’t think I could do the same thing for my younger two when they are on their own. I want to treat them fairly. The rent on the condo would help me break even, but I think the value will go up over time so it would be a good investment. What are my options?
— Mom

A. It’s great to hear that your children are doing well, with your oldest in the workforce and your younger children working toward their college degrees.

There are two key issues to address here – the pros and cons of investing in real estate and considering how to fairly share your financial resources with your three children.

On the positive side, the potential benefits to owning real estate include recurring cash flow, diversification, capital appreciation and tax benefits, said Jodi Cirignano, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

On the downside, she said real estate is illiquid, capital intensive, management intensive and can present liability risks.

“Unlike liquid investments such as a mutual fund or money market fund, real estate is an asset that may not be easily or quickly sold,” Cirignano said. “Accordingly, it is important to set aside cash for other needs and emergencies before making a large financial commitment to real estate.”

Recurring cash flow is an attractive benefit to real estate investors, and it is essential to compute your net cash flow after expenses, she said.

This will enable you to estimate your return on investment (ROI) and if your ROI adequately compensates you for the illiquidity and risk associated with real estate, she said.

Typical expenses for a condo include homeowner association fees, real estate taxes, insurance, utilities and interest expense. You also need to be prepared for special assessments issued periodically by condo associations to fund capital projects, she said.

“And while there will always be expenses with rental real estate, there are no guarantees with regard to rental revenue,” she said. “A tenant may lose his or her job and be unable to pay, and depending on state law, it may prove difficult to remove a tenant.”

Having a family member living in your condo may allay some of those concerns, but there are still questions you need to consider, Cirignano said. These include: Will I charge market value rent or offer a discount to my child? What if my child incurs a financial hardship and is unable to pay? What happens when my child moves out; am I willing to rent to a non-family member?

To help you answer these questions, consider meeting with your CPA or financial advisor to discuss this would be an appropriate investment based on your financial situation, objectives and time horizon, she said.

When it comes to treating your children equally from a financial perspective, there is no right answer, Cirignano said.

Much of it depends on the circumstances and family dynamics.

“Many families find it reasonable to offer financial support to an adult child struggling with a job loss, divorce or health issue,” she said. “However, in your particular situation, your older child is doing well financially and would enjoy the benefit of living in a family-owned home and potentially at a below-market rent.”

You may want to consider how your younger children may feel about this arrangement, the impact on family harmony and your family’s finances, she said.

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This story was originally published on July 12, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.