A frequently over looked form of real Estate Ownership is Tenants-In-Common (TIC). This form of ownership is sometimes used by unmarried couples buying a home together when the owners have different percentages of ownership. However, it certainly isn’t limited to unmarried couples. In many circumstances it can be the preferred way for two or more business partners to take deed of the property. The deed lists the specific percentage ownership for each co-tenant. A good use of TIC can be to hold ownership of a commercial property such as a small to midsized apartment building.
Besides not requiring a marital relationship and allowing two or more owners, there are other characteristics of TIC that work well for many business arrangements.
- Ownership does not need to be equally divided. For example Matt could own 45%, Linda 30%, and Cameron 25%. As long as it adds up to 100%.
- Unlike other business arrangements, there is no automatic right of survivorship. Barring any other agreement, upon death the interest of on tenant-in-common deed passes to the person’s estate or heirs.
- The property does not have to be sold in whole by all TIC owners. Although “first right of refusal” is a typical term of an agreement, it doesn’t have to be. Interest held by tenants-in-common may be sold separately by individual owners.
There are often TIC cost savings not available to other business arrangements. You may use an attorney but you don’t need one to enter into a TIC. The TIC is not registered with any government body other than the agency recording the deed. A formal recorded agreement is not required although it may be used. Accounting costs associated with partnership, trusts, and corporation tax returns are not needed. If you participate as an active investor, you can qualify for the $25,000 per year write-off against your salary, dividends, interest, and other income. No real estate or securities dealer license is required.
Advantages of TIC
- A TIC enables one or more people to come up with a down payment that each may otherwise be unable to invest separately. This enables investing in larger and more profitable properties such as small and medium apartment buildings.
- With two or more people on the deed, it is likely the size of the mortgage can be much larger. Those with a higher net worth and having a higher percentage of ownership can often borrow a higher mortgage amount. However, all investors will have to sign mortgage documents and can become liable if another defaults. This also enables the lender to foreclose on the entire property if one borrower defaults.
- Barring a separate agreement, each party to a TIC can encumber (borrow against, pledge as security, etc.) his or her interest in the property without consent of the other owners.
- Risk decreases among multiple investors. For instance, if one investor owned a four-plex and one unit went vacant, the vacancy rate would be 25%. A single vacancy in a 40-unit complex is a vacancy rate of only 2.5%.
A TIC may be set up in many different scenarios. One variation is based on the fact that not all co-ownership of the property must be established from the beginning. This enables future transactions such as selling a TIC ownership to a renter (or others) for a single unit of an apartment building.
In the absence of a TIC agreement, the characteristics of the TIC are established by state statutes and common law. Typically, each TIC has the right to possess and use the entire property, each may transfer their interest without consent of other TICs, and each shares the total property income and expenses according to the ownership percentages shown on their deeds. As in most business cases, because the laws governing TICs vary from state to state, before you make any decision on your apartment building purchase, it’s a good idea to meet with your attorney and tax advisor.
Do you have experience with a TIC or other seldom considered form of real estate ownership? Please comment with your thoughts and experiences.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.
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