BLOG 4 | Why your newborn baby should have her own house.

“Baby profile” by ragesoss is licensed under CC BY-SA 2.0

I recently had lunch with a good friend of mine who’s about to have a baby girl. Through the course of our conversation I said, “Have you ever thought about buying a house for your baby?”

There was a bit of an awkward pause, and she responded, “What do you mean?”

I then started to tell her about the concept of buying a rental property for your child as a legacy asset. It could be used to pay for college. It could be a place to live when they turn 18 (or 21). It could be sold to launch a business, or it could be held as a rental.

Most new parents I know have an existential moment pretty early in the pregnancy where they wake up in a cold sweat worried about how they will pay for it all.

The traditional path is to open a savings account for you newborn, and then fund it with your own money and gift deposits from family and friends. The thought is that the parents will make regular contributions to the account and it will be a nice nest egg in 15 years.

Let’s jump into the numbers.

Say you opened the account with $10,000 and deposited $100 a month every month until your child turned 15. The best savings accounts right now are offering around 2.5% APR interest.

So what would that be after 15 years?

$36,402. Not bad.

Let’s say you did a similar plan, but invested in the stock market. Let’s give yourself an 8% APR. After the same 15 years, your balance would be $67,903. Much better, right? 

“Piggy-Bank version 1” by cafecredit is licensed under CC BY 2.0

What about a 529 Plan? If you’re unfamiliar, this is a government sanctioned savings plan to be used for higher education expenses. There are a lot of features with 529s, but one that catches many people’s eye is the ability to buy tuition credits at todays prices that can be used in the future. 

Personally, I think 529 plans are awesome, as long as you are 100% sure your child will be going to college.

Now, back to my original point. What about buying a house for your baby?

First the bad news, in the Puget Sound area, your initial investment will be more than $10,000. Most likely much more. But stick with me because I think I can convince you that it’s going to be worth it.

Let’s imagine that we are going to buy a “bread and butter” rental that’s close to a University, tech hub, or large employer. Thankfully, there’s plenty to choose from in our area.

For the sake of argument, let’s look at the real estate equity created in a $200,000 rental property with a 20% down payment and a 15-year amortized loan at 5.0%. (As I’m typing this, you can actually get 15-year loans down in the threes, depending on your credit score, but I digress.)

For the sake of our conservative example, let’s give ourselves two possible scenarios. First, let’s assume that the house never appreciates in value. Our down payment is $40,000 – so that’s the immediate equity position. In 5 years, our equity is $80,708. In 10 years, it’s $132,952 and the house is fully paid for in 15 years and it is worth $200,000. Keep in mind, it’s not that’s putting in money month after month. That’s your renters paying the mortgage with their rent checks.

“The Doll House” by morticide is licensed under CC BY 2.0

That’s the best performance of anything we’ve looked at so far. If you’re wondering, “Well, what if I just put $40k into the stock market along with $100 per month, what would that look like?”

Good question. Your account would be at $167,111. But you wouldn’t own a house free and clear. 

That’s the beauty of real estate. At the end of 15 years, you own the house and the mortgage has been paid for by renters. You now have an asset that is generating nothing but profit for you.

One more scenario with this house. Let’s assume that the property goes up in value over this 15 year time frame. While I can’t guarantee this, does anyone think houses in the Seattle area will be worth less than they are today in the year 2034?

If we assume a 5% per year increase in value, our numbers look even better.

Our immediate position is still $40,000. But in 5 years, we’re at $135,964. In 10 years your equity is $258,731, and when the house is paid off in 15 years, your equity would be $415,786.

To wrap up our thought experiment, if you bought this house when your child was born, you’d have 3 more years of rents coming in with the place fully paid off. When your kid graduates high school, you have a boatload of options.

After your initial down payment, the place virtually pays for itself. Obviously there are maintenance and taxes along the way, but you get my point. 

My lunch pal was definitely interested as we finished up our meals, as I hope you are too.

If you want to explore something like this for your family, don’t hesitate to reach out to me: ron@windermere.com.

*House example from Windermere’s “Invest In Your Children’s Future Through Real Estate” article.

 

Posted on July 28, 2019 at 9:31 pm
Ron Upshaw | Category: Children, Economy, Investing, Real Estate, Seattle

4 responses to “BLOG 4 | Why your newborn baby should have her own house.”

  1. Kristine Geldart says:

    I find this very interesting Ron. I am taking a course right now to become a Mortgage Broker in British Columbia. I am 56 and my husband is 61. We have 14 and 16 year old children. Yes, we started late.

    After seeing how housing prices have absolutely exploded in Vancouver and Victoria, affordability is certainly an issue. Much of this explosion was due to foreign buyers not living in the newly purchased homes (condos, houses) and thus driving up prices. As well, it used to be that when our parents and their parents purchased a home, it was their forever home. Now, people don’t stay in their homes as long and some buy just to flip, further driving up prices. Renting now is so unaffordable, it makes it nearly impossible to save for a down payment or even to make ends meet.

    I think about my children’s future housing. Food, shelter and clothing are the most important (in my mind). So, how can I help them at this late date? Well, hopefully I’ll make some great money as a broker and can invest or become a lender myself. We own our land which has a rental property on it as well. We have made the decision for this to be our forever home and allow it to accrue equity and leave it to the children. We bought it in 2002 for $198,500. It is now worth $600,000. Just like in the days of old England, the property stays in the family.

    I really love what you have offered here though……and see if this might work here. Thank you so much!

    Kristine Geldart

  2. Cynthia Blix says:

    I wish I had seen this article 25 years ago! I invested in one of those GET programs instead and I’m not sure my youngest wants to go to college now…

    • Ron Upshaw says:

      I know right, you’re not the first person to tell me that. Everyone assumes that college is mandatory, but today’s job market is just not set up that way…

  3. Becky says:

    I like it! I think you are leaving out the inevitable improvements that a house would need?? How do you figure the new roof in?

    I’m in though… let’s do it!

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