Parents buying somewhere for DD - is it a good idea

[ctownsie]

Hi, mainly looking to see if this a good idea or not as I'm clueless.
DD is 18, in her first year of med school in London - 6 year course.
My parents recently sold their London home the area went through a lot of gentrification in the time they lived there (over 50 years) so the house ended up selling for over 2 mil.
They relocated, downsized and have a lot left to play with. They've topped up their already pretty good pensions.
I have 2 kids and im an only child. DD18 and DS15.
My parents are now wanting to buy DD a flat in London that she can share with friends. They've found a 4 bed they and DD like near uni and friends, for a little over a million.
They are planning to put down a deposit of £500,000 or so, this will be all of DDs inheritance. Then she can rent the other 3 rooms for roughly £1250-£1350. My parents said they will deal with all the landlord related tasks. They are 74 and 75 so I'm not sure that's the best idea but ok.
DD says she already has 2 friends who would be able to stay there.
My parents think this is a much better alternative to DD looking for somewhere to live for the next 5 years.
AIBU to be worried this might not be the best idea? Are there any flaws they might not have considered?
They'd still have money left should DS want the same though DS hates London and would never go to London again if he would so I doubt he would need somewhere so expensive.

Not sure its a good idea either..
Why a 4bed with mortgage??
Why not a smaller flat no mortgage?
Whose asset would it be?
Think they should talk to an inheritance tax specialist accountant about their money

Expecting you to just pick up a mortgage also not good...

Its a lovely idea for dd to have somewhere to live and a flat in London is generally a good thing to have ... But being a landlord is not always great...and you dont want DD constrained in her life because of it either... She may not stay in London.. and also relationship with other tenants/flat mates .. what if they are a nightmare... Or she doesn't get enough to cover the amount .... Too much stress all round

It’s not really your parents buying her somewhere if you are expected to take on a mortgage for half the value. If this is the case I wouldn’t be letting them lead the charge on finding a property, you are taking on a huge liability.

It's very expensive to buy near UCL, I went there and its nowhere near Latimer Road. A 1 bed will be 500k. UCL has a great social life.

Sorry Latimer Road was an alternative where DD would also be close to somewhere she spends a lot of time, I know it's a fair bit away from
UCL.

If they bought a two bed flat she could live in it and have a friend as a lodger. Much easier to deal with the legal aspects this way and the income is tax free up to £7500. If they want to give an early inheritance it could all be in her name and the lodger income could pay the bills and upkeep. Alternatively they could own it and let her live rent free and keep the income from the lodger to fund the bills and living expenses.

This would be easier all round. Not as finacially beneficial, but much less effort especially as the gps are elderly.

Buy a smaller flat outright as their own investment in their names & let DD stay there during her uni stint, maybe with friend paying rent. What an amazing setup, lucky girl.

Don't start dabbling in remote landlording. The more people, the more problems will arise for aging GPs that undoubtedly you'll end up sorting.

Don't start gifting kids houses - giving one GC a 1M flat in London while the other might get a 500k house in Leeds is an absolute first world problem, but will likely cause division, especially as they sell up & move on.

Keep it as simple as it can be.

My parents did this. Admittedly it was the 90's and not in London so the numbers were a lot smaller.
I wouldn't go for anything bigger than a 3 bed.
The mortgage was in my name with my dad as guarantor.
I never let the rooms to friends.

I think it's an excellent idea as long as they (or whoever technically will own it, hold the mortgage) have thought through the practicalities. I know a few people whose parents did this and it set them up well for life after uni. Gosh, I think about the money I blew in my 20s on rent and it would have made a big difference to me to have that equity built up. I'd probably be mortgage free now in my 40s.

On a practical side, 3 housemates are a lot of personalities to deal with. I would probably be inclined to go smaller - 1 or 2 house mates - and also to not necessarily aim for friends. But you and your dd know the relationships there better than anyone.

Is your DD prepared for the dynamic between her and her friend to change once she's effectively the landlord and/or, as you said in a previous post, benefitting from the profit on the rent?

And what happens if friend is a problem tenant? Who's left carrying the can for the expensive mortgage? Are you really going to sue/evict your daughter's friend (possibly her closest friend and support) over missed rent if it comes to it?

I'd buy something smaller outright and consider putting it in both children's names.

With a view to doing same or switching things about / buying out when DS needs somewhere.

That would protect your youngest should the remaining money be eaten up with care home fees IHT etc or something unexpected.

Bloomsbury, Holborn, Islington are all very popular places to live with beautiful properties but do look at the service charges and length of the lease which can be quite short.

Consider getting the house in trust. She is young and if the house is in her name and she ends up in a bad relationship, gets married and divorced, she will lose half of the house. Being young and with such a capital under her name she may end up attracting the wrong type of partner. He will rush to marry, stay long enough to be able to take his share and leave. Talking from experience. Her 40yo self will thank you!

For £500k she could have a flat outright in the London, maybe with flexibility on size/location but definitely a good one or two bed is possible in a decent area. A renting agreement is very likely to get complicated at some point, particularly given ages.

Why dont they buy the whole property in both childrens names. They can then split the rent from any tenants between both children to be used for uni costs or put into savings and when it is sold split equally between the two?
at 15 your sone has several years before he’ll need his share and the income from rental would possibly give him a deposit for somewhere until it sells in 6 years.
after 6 years your dd will have the option to buy him out.

Well it’s an incredible opportunity. I would say yes. And yes to the 4 bed. I am not really seeing any downsides. Worst comes to worst she could Airbnb it and live elsewhere.

Absolutely wonderful and generous but I agree with the posters that a smaller place owned outright would be better.
I would have hated to be landlord to my peers at that age. I can imagine it could potentially cause a lot of work, alienation and stress. I am very risk adverse though!

With all due respect OP your parents have more money than sense. Looking at a 4 bed, expecting you to take out a mortgage for DD. I wouldn't trust them to manage anything financial properly - such as landlording. It's great that they're so generous. But they've made their money through sheer luck, not financial prudence.

The only thing you should be agreeing to is them buying your DD a property outright. No mortgage etc to worry about. The rent can go into a fund for the costs of being a LL, for if your DD eventually leaves.

I think the huge mortgage is an awful idea, and buying somewhere smaller outright is a far better plan.

And they need to make an equivalent purchase for DS, or put the same amount into to a trust for him or it will be very unfair.

And I don’t agree with outright. We are in massive era of inflation. Borrowing money is expensive right now but it’s still less than traditional investment returns. And the housing market is flattening. So no I definitely wouldn’t buy outright. It is not financially sensible in the long run. You aren’t leveraging your money, it’s not being put to work. It’s literally just at the whim of the housing market.

Friends of mine looked at this for both their children (at different times), and decided the best (and simplest) way was to buy a house in the cities where the children were studying, and let it to them for a low rent, to cover things like insurances, management fees (they didn’t manage it themselves, they weren’t local).

They had a proper tenancy agreement setting out all the terms and conditions, and which allowed the tenant to house-share, and thus bring in enough to cover not just the their costs of the house, but enough to cover quite generous living costs.

The properties remained part of my friends’ estate, and was in some form of Trust, preventing it being sold for a period if both of them died before their kids had finished studying.

Their return on this was the equity gain over several years, although in one case, that meant they kept the house after their child moved out, and rented it out to other students (no doubt at a hefty profit).

it saved all the issues about other people getting mortgages, potential deprivation of assets etc etc.

This sounds like an amazing idea, and lovely of DGP but... I can see a lot of problems. The landlord/friends thing, as many PPs have pointed out - it would have to be managed by an agent I think just to provide a buffer and to make sure that when the toilet blocks on a Saturday or the boiler breaks on a weekend cold snap, you/parents/DD aren't trying to sort emergency workmen.
Secondly, horrible I know, but IHT implications do need to be thought about. Bear in mind that gifts made with 7 years of death are brought back within the deceased's estate. And it will depend what is in their wills as well as to what comes within the 325K tax-free limit. Just make sure that everyone knows what the tax implications are as it's horrible trying to untangle that stuff if someone dies unexpectedly.

How long will she live there OP and will she need to sell when she moves on?

I hope they're discussing this with a solicitor expert in wills and IHT. Also tenancy agreements and legal obligations as landlords

Otherwise there could be a lot of problems when they die

On the surface though, she should bite their hands off

Smaller flat sounds idyllic to me in your daughter’s situation.

Also, wouldn’t a one/two bedroomed in London be much easier to sell later than a four bedroomed although I only know the London property market from what I read and from my friend who is a tenant?