Tenancy in Common Agreement
As you know already, real estate should play a major role in any comprehensive investment portfolio; it provides an excellent means to diversify your mix of investment products and significantly minimize overall risk with the use of leverage. Of the many ways to title a piece of property, a Tenancy-in-Common (TIC) agreement is one of the most used. You know it as you and your friend or partner buy a property. Each person can sell, give, or will their ownership to someone else (unless you have an additional clause). Over the past few years, the TIC Investment has gained popularity as more and more investors are seeing this real estate strategy as a tool to bolster their portfolio and increase wealth. The added value of the crowd funding partnership allows investors greater purchasing power by pooling resources, allowing the group to acquire a higher quality property. A TIC can provide the investor with a variety of benefits such as tax credits, investment flexibility and positive cash flow. However, as with all investments, it’s important to do your due diligence and learn about the advantages and potential risks before jumping into TIC investing.
What is a Tenancy-in-Common Investment?
A Tenancy-in-Common offers a group of up to 35 investors the ability to share ownership in quality residential, commercial or industrial properties. Each owner-entity owns an undivided fractional owner interest in the property and shares the net income and potential growth in value. Each owner entity retains the right to sell or will their interest. TIC properties are acquired by a TIC sponsor, who looks for opportunities with a 5-7% cap rate and then interests are sold to investors offering a maintenance-free ownership opportunity.
Dr. Robert G. Hetsler, Jr., of Qualified Intermediary Capital Advisors, a financial firm specializing on 1031 Exchanges, business valuations, real estate investing and forensic accounting, is an expert in storage TICs based out of Jacksonville, Florida.
Here is Hetsler’s bio:
Hetsler explains the basics of the TICs:
How does it work?
TIC Investment properties can come from any number of sources.
- Public auctions
- Distressed properties
- Vacation rental properties
- Residential buildings
- Probate properties
- Industrial properties
- Commercial properties
- Health care facilities
Hetsler suggests that investors diversify their investments, purchasing interests is various types of TICs. He stresses that it is important to work with experts who specialize in the type of TIC you wish to purchase:
Once these properties are purchased, the TIC sponsor will then sell off the ownership shares at a mark-up until the property is wholly owned by investors. At this time, the sponsor will create a separate trust which will lease the property back from the owners and provide management to tenants. Owners will share in the net cash flow and property value increase according to their share of ownership.
Hetsler has some good ideas about how one should select a sponsor:
One of the biggest benefits of a TIC is the flexibility it offers to investors. While most offerings do have a minimum contribution, the amount is flexible and allows investors to invest any amount which fits their financial needs without compromising the quality of the property.
A Tenancy-in-Common Investment is also valuable for those under time constraints. Investors utilizing a 1031 Exchange have only 45 days from the sale of the previous property to identify the replacement property and 135 days to close. Because the offering is made only after the property is purchased, the purchase can be completed in a few days instead of months. (Editor’s Note: For those wishing to learn about the incredible benefits of the 1031 Tax Exchange, we recommend our course taught by Dave Foster, https://www.learnfromgreen.com/course/1031-tax-deferred-exchange-introduction/. You can thank us later!)
One of the biggest advantages of a TIC is the ability to defer capital gains tax via a 1031 exchange. A 1031 exchange allows an investor to defer paying capital gains on a profitable sale of an investment property if they reinvest in a similar investment, in this case real estate. By deferring the tax, the investor has more money to invest into another property, thus maximizing their ability to leverage new properties and increase their returns.
What are the risks?
As with any investment, there are risks. For one thing, a TIC is not a liquid investment. Most require that you hold the property for 5-10 years. The investor also does not have any direct management of the property so they do not have control over the day-to-day decisions. Also as with any real estate purchase, there is the risk of a decrease in property value.
Hetsler outlines the potential challenges of TICs:
It’s important to do your due diligence and examine the offering very carefully. Research the management team and sponsor before investing and understand the unique challenges the investment might face. In general, the Tenancy-in-Common Investment offers an investor a flexible investment opportunity to own high-quality; income-producing, maintenance-free properties which might be out of reach otherwise.
For more information about TICs, 1031 exchanges, or any of our product information, see us at www.learnfromgreen.com or call me directly.