As 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 investment and compounding works.
As they grow into young adults, you need to 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.
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 $500,000 at age 20 and it grows by a conservative 5 per cent every year, it will pretty much double by the time you are 35 to $1 million.
How many people have $500,000 of equity at this young age though? And by age 50, it will be worth four times what you paid for it at $2 million. If the growth is the higher rate of 7 per cent, then the property will double in value every 10 years, thus accelerating your equity build-up dramatically.
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, 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 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 kick-start their wealth creation through property. Here are a few:
Offer to be a security guarantor for the deposit:
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% deposit on the property. You would then be responsible for the repayment of the 20% deposit only.