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Many baby boomer parents who are approaching retirement age have been frustrated at receiving virtually nothing on their lifetime savings from CDs (certificate of deposits) at banks. Some baby boomer parents have become frustrated with their children – adult children – who can't or won't leave home. Household formation, after all, has slowed to a crawl despite decent overall population gains in the past 3 years during the Great Recession and the subsequent slow job market recovery. (The population can increase without a similar household increase if people double and triple up, or continue to live with family members.)
A perfect solution may be at hand for this type of situation. Parents buying a home for their kid – with all cash or something close – can then have their kid pay them the prevailing mortgage interest rate of around 5 percent or so. That 5 percent return surely beats the near-zero rate offered on bank CDs. At the same time, it is a great way to help the child leave the nest with compassion. Anecdotal stories on this trend have been surfacing in the past year. Recent unprecedented high levels of all-cash deals in today’s market also give indirect supporting evidence to this hypothesis. However, it is still unclear how prevalent the trend is, or whether there are hidden drawbacks to this strategy.
Have any of you had any clients like in the above situation? And does this kind of approach make sense? Let us know in the comments.
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