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.

You need proper financial advice. There are inheritance tax implications and all sorts involved

So, in reality your parents are putting down 50% deposit in order that you and your H can take out a mortgage and buy a property for your DD. And in order that the mortgage you will be liable for gets paid, you're relying on an 18 year old to select tenants. Its a very generous offer, but in your shoes I'd not touch it, as there's no way I'd want to be a buy to let landlord with a £500k mortgage. Because if it's in your name, that's what you'll be. Surely if they want to gift DD £500k there's properties that could be purchased outright?

I would suggests buying somewhere else in DD and DS name outright. Renting via an agent to reduce hassle for your parents
Long term investment

Don’t forget the rental income will be taxed OP.

my parents bought a flat for me to live in while I was at uni, on the whole it was a good thing, it was in my name but they were guarantors on the mortgage. It was also interest only (a few years ago now). A few years later I was able to sell and use the deposit on a larger property with my partner, I also had the option to keep it and rent out which would have been better with hindsight but equally the flat needed a bit of work doing.

I would say that a 2 or 3 bed is probably better in terms of reducing the hassle of always making sure all the rooms are full. Also I do feel that it made me feel that I needed to stay in the same place and had I been renting I would have maybe moved abroad or elsewhere. But that’s maybe down to my parents attitude about it. In the plus side though it was good to not have the stress of finding somewhere to live every year or dealing with bad landlords.

Depends how willing they are to compromise - I was doing my MA in London 6 years ago, lived in a pretty minging houseshare with some (slightly weird) professionals in Isle of Dogs for £360 a month. Obviously rents have gone up, but even if they've doubled then I'd wager you can still get somewhere for under 1k as long as you really hunt for it and compromise on things like nice furnishings, carpets, living room etc

Your parents must speak to a financial advisor and a solicitor dealing with wills, trusts and estates.
There are various issues that may occur: whose name will it be in, how will they finance the remaining 500k, how will they ensure your DS gets an equal amount of inheritance, what would happen if either of them needed social care/a care home that would eat into their assets, how might the income from rent affect their tax, how might their estate be affected when it comes to inheritance tax etc.
There are multiple questions that need exploring and they need to do this with professionals.

I don't think it's necessarily a bad idea - but there are lots of things that need looking at before jumping into this feet first.

Personally I would think it better to buy her a smaller flat with no mortgage. Imagine if one of her friends couldn't pay the rent and she had to evict them because she needs to be able to pay the mortgage. Even if the grandparents are dealing with it it will end her friendship.

No.

Grandparents can buy her somewhere for her to live alone, and same for your other child when of age.

They should not be committing your dd to becoming a live-in landlord.

You also have to think about repairs etc - multiple students living in one flat is going to get messy quickly. Would they not just outright buy her a one bed in London just for her for less???

Glad to see I'm not too unreasonable in my costing.

I was wondering about the uptake of (student) renters at such a high amount. Is there a risk of being left with a mortgage that isn't covered by the rent, or if gaps between renters.

It needs thought. Are your seventy something parents really going to be regularly travelling to London to do repairs?

Does your daughter really want to be a landlord?

Who will pay any service charge or major works bills?

Sounds like a great idea, but I wonder whether suggesting they put £600k into the pot in stead and put the lot in trust for both your children; the trust reverting to them when DD is 25 (& DS is 22)?

Both DC then benefit from the rental income and uplift in value in the 7 year interim? They could then sell it at that point if they wished - i.e. a year after DD graduates Med Sch and DS graduates from uni, by which time they may neither of them be in London? Or rent it out and use the income towards properties elsewhere - the options are endless.

It would mean both of them would have an equal advance on their inheritance which would not be subject to inheritance tax? If your DS were to receive his share 3yrs later, there is a higher chance of his share falling outside the lifetime gift rules (if your DPs pass within 7 years of gifting, your DCs would be liable for Inheritance tax).

They might also want to place additional funds in an educational trust to pay uni fees at a later date too?

My advice would be to talk it through with an accountant and solicitor, with your DPs, so that they can be reassured that their gift to their DGCs is maximised.

What lovely, generous parents you have to want to ensure your DCs have a solid start in life.

@ctownsie Are you going to take out another 500k mortgage in 3 years time when your DS is 18 so that you can do the same for him?

Are you able to borrow that much for each of them and meet the repayments on £1m mortgage?

If I was your dd, I’d bite their hands off for a chance like this! I only wish I had the money to do the same for my dd …

Many buy to let mortgages include a clause stating that family members can't live in the property. You will need solid mortgage advice.

I don't think she should buy with the friend she wants to live with.
A smaller flat bought outright by grandparents would be the best idea (but you'd have to really look at the legal situation here of who owns it, what happens if they have to go into care and so on and so forth).
She can get someone else in as a lodger - it doesn't necessarily have to be the friend with the inheritance. She shouldn't think too much in advance about how long someone's course is, whether they will be away for a year or whatever. I don't think she'd have any problem finding someone else to move in.

I think it’s a great idea and would just consider the following: both son and daughter should get 500k, whatever location that is then spent on. I would buy now whilst asset prices are comparatively low and inflation will boost the investment. I would buy a bigger flat rather than 2-bedder as someone had suggested as this is more flexible in the future - it could become a family flat for her in the future, for example, and a 2-bed doesn’t have the same potential. Totally fine to rent out to friends - these will be transient but they will effectively help her build a better asset over time. If she wants to leave London at some point, she will have something valuable to sell and buy a house elsewhere - much more so than your son as prices just don’t rise so much in other locations (generally - obv some exceptions). Deeds should be in her name though to protect all round including on stamp duty when she sells. If your parents died within seven years of the gift, IHT will kick in but that’s the same on cash or stocks.

Very isolating to be living in your own in London at 19

Would they not be better buying something outright for the 500k? Less central you're still get something half decent for that even in London. No mortgage complications and she can have friends as lodgers rather than tennants which saves a while lot of hassle.

It’s worth considering the dynamic between friends where they are paying your daughter’s mortgage…

I was in this position, being the tenant of a university friend in London the year after we graduated. I was naive to the dynamic at first, being only grateful to be starting life in London sharing with friends. But my parents referred a couple of times to the fact I was paying off her mortgage, and it was only a few years later as a hard-working adult who couldn’t conceive of ever being able to buy a place in London that I realised what they were getting at, and I thought of the thousands I put into my friend’s assets when each month I was barely scraping by.

There were a few issues around maintenance where if something in the house required repair she would (naturally) get stressed because she was having to pay for it. Sometimes she made us feel under excessive scrutiny when she grilled us about whether we had done anything to cause damage.

All of this is a lot to deal with for both landlord and tenants with relatively little life experience!

And, importantly, it is not an equal footing for a friendship.

I’m not advising you against doing it! Your daughter is in a very privileged position which should be enjoyed. But I do suggest it’s worth some careful thought and ongoing conversations with your daughter to help her navigate the responsibility of being a landlord and how this affects practicalities of living and relationship dynamics.

Co owning at that age is a terrible idea op, what if they fall out, one wants to leave etc? Get boyfriends etc etc etc..

why can’t your parents just buy the smaller flat themselves and just let her live there rent free? It’s such a massive commitment to expect her to stay in that area, she can’t travel, or move easily and has the agro of finding someone to share with who can pay market rent.

I know it sounds crazy, as it would be a dream for some people, but she shouldn’t be saddled with such a responsibility.

plus the flat will be available if ds chooses the same path.

But who’s taking out the mortgage???

Also word of warning. The first house we rented in London as graduates was a three bed house the landlords had bought for their student daughter to live in and rent to friends.

We first spoke to the parents but were told the daugher had dropped out of Uni and was moving in with a boyfriend, but would be our contact - the place was infested with fleas due to a stray cat being left there, the telephone line was cut due to debt, there were court summonds for non payment of council tax, in the first month we had a visit from bailiffs to reposses a rental TV they left, there were regular deliveries of catalogues and parcels of an .... um ..... adult nature for the daughter.

She went AWOL after a few months so we dealt with the parents after that. They were nice but utterly naive and clueless. Luckily we were resourceful types and sorted the problems ourselves and stayed as the rent was very cheap.

But where ever you rent, you are paying off someone else’s assets/mortgage?

So long as the rent is a fair rate for the location/quality of property, the fact that it’s going to a flatmate’s mortgage is irrelevant - she is the one in a lucky position to have a deposit; she is the one with the risk of negative equity in a downturn.

Lots of my friends rented in properties bought by working boyfriends of one of their mates or by parents - usually at a slightly lower than market rate because the objective was to provide a safe, high quality home and not fund a faceless property developer via extortionate rents who then failed to maintain it properly.