Advice and Opinion

Helping your child onto the property ladder

Parent with child

We all want our children’s futures to be happy, productive and secure.  Although there have been recent changes to transfer duties, helping first time buyers enter the market, getting onto the property ladder can be difficult for your children, with many only able to purchase their first home in their late twenties.

With June focusing on the youth, Jonathan Kohler, CEO of Landsdowne Investment Properties outlines how parents can help their children get onto the property ladder well before they’re even out of nappies by buying an investment property, which can be a great investment for their child’s future.

“Buying an investment property for your child is a little different from buying a house for your family to live in.  In many ways, it provides even greater potential gains, but you need to expand your investment horizons to maximise that potential,” says Kohler.

If you were to buy a one bedroom, one bathroom investment property apartment for a child when they’re born, the home loan for the property would have been paid off, at minimum, by the time your child is 20 years old.

For over 12 years in the residential sectional title space, the one bedroom apartment has been the best investment property performer. Property prices can range between R750 000 to R1 million in this sector of the market.  “The rental achievable for studio & 1 bedroom apartment range from R5 000-R8500/month – dependant on the location and positioning within the complex.  This rental price point constitutes the largest amount of quality tenants in South Africa. These are people who can afford to pay between R5 500-R8 500/month in rental”.

Affordability for these clients should be calculated, the same way banks pre-qualify clients for a home loan, their gross monthly income should be 3 times or greater than that of the monthly rental amount.  So, to qualify for a monthly rental of R5 000/month, a tenant would need to earn a gross income of R15 000/month.  Similarly, to qualify for a rental amount of R8 500/month you would need a gross income of R25 500/month.  “The largest market of quality tenants, first-time home owners & first-time investors would then fall in between the R15 000-R25 000 mark”.

“Property can be a great investment for a child.  At best, it grows in value and helps secure their future.  If the worst happens and the property falls in value or remains stagnant, at least they will have property they can hold on to during the lull in the market.  The one bed, one bathroom property market is relatively immune to volatility in the market, as there’s always tenants that fit this criteria,” adds Kohler.

Property A:  1 bedroom ground floor apartment

Price: 740 000 (transfer duty free)

Rental: R7000

Levy: 977

Rates: 320

Net rental return: 9.25%/annum

Appreciation: 8%/annum

Total return on investment: 17.25%/annum

To protect both your child and your investment, it’s worth keeping the following in mind:

  • Maintain full ownership of the property until your child is responsible enough to use it wisely.
  • Many financial advisers recommend maintaining an interest in a property even after transferring the title to your child’s name. This gives you some control and can help prevent a young adult from making a disastrous mistake.
  • Getting your child involved in the maintenance and management of the property will help prepare them for taking ownership.

Kohler says that while the property investment will help get your child on the property ladder, gifting your child, a property will have tax ramifications, including transfer duty and capital gains tax, but will help them to get into the property market and will catapult their financial well being well before they realise the gift you’ve given them.