“Hello Dr Ro, I’m really hoping you can help me.
I’ve worked most of my life and I’ve paid off all the mortgage on my house. I have two children. One of them is 27, the other one is 34. Both of them have asked me if it would be possible to lend them some money from the equity from my house. The biggest challenge that I have is that I really am just not sure of the benefits, because I figure in the future at some time, I’m going to pass away. My house is worth around about £400,000 now, and maybe in about 10 years or so, it will be worth about £800,000. So I figure I was just going to leave them the house and they can have the equity when I pass away. What are your thoughts on that?”
I’ve been asked questions very similar to this one over the years, running hundreds of seminars. It is a very common question for parents that have children and have worked hard, but at the same time want their children to benefit from the hard work at some point in the future.
I think the most important thing here is you’ve got to ask yourself a question:
What is the outcome you want for your children?
Do you want them to wait another 10, 15, 20 years to get the benefit of that equity and the money that is in the property?
Or do you want them to have the benefit of it now, so that they can start to create and change, and maybe have a different lifestyle whilst you’re still around?
And the two are different.
The first is what you’ve described, which is sitting on the house. It’s a philosophy that we have had for many years, particularly my parents had a similar mindset and that is that you leave the house for the children in the future. The second is an opportunity that wasn’t around when you grew up, which is to release equity to get that equity working, and in so doing creating a passive income and a greater value for the children now.
For example, and this very simplistic: £100,000 chopped up into £25,000 deposits would buy another four properties, each worth £100,000 each. So, actually over the next 10 years there will be your home worth of £400k, plus a portfolio worth £400k, which would possibly double over 10 to 12 years, which means in total, your children have access to the £800k of yours, plus the £800k in the portfolio. Think about that for a moment.
“Okay, so I guess my only concern is if they release the equity or take the equity that I release, how am I going to get it back? And also how do I know that there is going to be a benefit? If they take that money from me, I’d like to have some sense that at some point in the future, maybe I can still leave them with that equity.”
I think this has to be answered by you sitting down and talking to your children. Because ultimately, they need to be using that money. But they can be using that money with guidance. Maybe mentored, getting some knowledge on how to do this. And buying properties in an area where they can get cash flow and ideally some long-term capital growth.
From my experience, you have to be aligned, and when you’re aligned, what I’ve seen is a great movement forward and there’s definitely excitement within the family.
So, I think that’s a conversation you’re going to have to have with your children. It’s my belief and I know this from personal experience, that your children need to be aligned with you. They need to be of the same mindset and have a common goal to work together, and if there isn’t that common goal it’s going to be hard to move forward, unless you’re splitting the money and giving it half and half.
You have to remember that you’re giving them an opportunity to take that money and ultimately develop a business. And if they don’t have business knowledge or training, then maybe this isn’t the best route for them and you should leave the equity in the house.
“Hmm so, what you’re saying is that the equity from my house could actually help them produce some residual cash flow like a passive income, and in which case the equity in my house is almost dead money until I release it or they release it in the future, whereas now they can actually get a genuine cash flow from the equity through buying buy to let properties?”
You’re a fast learner! That’s exactly right. Again, it has to be done in the right location. The right type of property. In simple terms £100,000 could be chopped up to £20,000 deposits. You buy £100,000 houses, out £20,000 on each one, that’s five properties. In the low value areas in the United Kingdom, for example, that could get you £250 per property in cash flow.
Let me just clarify that. That is the net. So, your gross coming in, minus the mortgage, minus the running costs, minus the management fee gives you around £200 to £250. Your £100,000 has bought five properties, so that’s £1250 per month net cash flow. Now of course I’m generalising, you would have to do research and find those areas where it happens. But what it does, it enables that long-term cash flow to be created over a long period of time.
The other thing to remember is the equity is literally sitting there in your house. It’s not creating a lifestyle. You can’t go to a restaurant and pay for a meal with that equity, but you could from the cash flow that it is used to buy cash flow generating properties. Now again as I say, you must take guidance and speak to an independent financial adviser about what is achievable. But of course, the other thing to consider in all of this is:
How long you want to leave that equity out?
For example, they could buy the five £100,000 properties over the next two years. And then you might have a plan to agree with them that over that period, plus a few more years, depending on the timeframe, they have the ability to refinance those properties. So, if they’ve bought them below market value, they can add value, refinance pull the original equity back out and ultimately give it back to you. If that is what the plan is.
“Wow, I never even knew this was possible, I have to speak to my wife about this. What’s the next step if I want to do this? I mean where do I go next and what’s the best conversation to have with my children? And also, where should they be investing? A lot of questions obviously.”
The question, where do I start? I think, yes, have a chat with your family obviously, speak to your children. I think that’s really important, sit down as a family and discuss what the long-term plan is. You’ve worked all these years. Do you want them to wait another ten or twenty years before they get access to that equity, or under a sensible guidance do you want them to actually do something with this that enables not just them but possibly you to get the benefit of this now, rather than at some point in the future?
In terms of where do you start? My suggestion would be to go over to my Dr Ro youtube channel. And that will give you some guidance and some tips at least at this stage, and there’s some good stuff there on mindset which I think is really important at this point. I wouldn’t worry too much about where you’re going to invest, because you need to get your strategy right first. Once you’ve got your strategy right then you choose your area, then you start to buy the properties.
Education is essential in all of this. The other thing you should do is find a good mortgage broker. Because without a good mortgage broker, and an independent financial adviser who can look at your situation, you won’t really get a handle on what’s achievable in terms of equity release.
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