Discover The Tenants-in-Common Form of Ownership- Part 1 of 2
I recommend purchasing midsize apartments. Apartment investing usually requires more money than investing in single-family homes or smaller units. If additional capital is needed, consider forming a small group of active investors.
There are various entities available to group or gather investors. Some of the more familiar ones are limited partnerships, corporations, general partnerships, and real estate investment trusts. A relatively unknown form of ownership to effectively gather active investors is the tenants-in-common (TIC) form of ownership. It’s an easy, low-cost method of funding real estate investments while maintaining tax benefits.
Ownerhip Features that Provide Flexibility
Tenants-in-common is a form of ownership that may involve two or more people, and it does not require a marital relationship. With a tenants-in-common ownership:
1. There can be two or more co-owners, but their ownership interests in midsize apartments need not be equal. For example, if three people are co-owners, one could have a share of 25 percent, another 30 percent, and the third 45 percent.
2. There is no automatic right of survivorship. Unlike joint tenancy, a share in the real estate investments held by one owner does not automatically pass to the other owners at death. When a tenants-in-common owner dies, that owner’s interest is transferred to his or her heirs and not to the other tenants-in-common, unless there’s an agreement giving title to the co-owners.
3. Interest held by tenants-in-common may be sold separately by individual owners. In many cases, when tenants-in-common first acquire the property, they agree to give the other co-owners a “first right of refusal” to buy out one another.
Ways to Save With a TIC Ownership
Here are seven advantages of the tenants-in-common ownership over other entities when investing in midsize apartments:
1. Low set-up costs: Compared to other forms of ownership, tenants-in-common has one of the lowest set-up costs. You don’t need an attorney to prepare offering circulars or registration with governmental agencies. In fact, all that is required is to have the names of the owners recorded when the transaction closes. A formal document is not necessary, though we would recommend one. Accounting fees for preparing partnership, trusts, and corporation returns are eliminated as well as state and federal income taxes.
2. Low down payment: In some public offerings, restrictions are imposed on the use of leverage. Using the tenants-in-common form of ownership when investing in rental income properties, there are none. This is an important investment strategy in purchasing and selling midsize apartment complexes. The lower the down payment, the more leverage, and the more property you can control.
3. Active voice in management: An important investment goal is to reduce taxes. The tenants-in-common form of ownership does this by allowing an active voice in management. Tenants-in-common owners, with the help of qualified consultants, are extremely effective in making the right decisions. The old adage “two heads are better than one” hits the bull’s-eye, especially when these heads are concentrating on be-coming wealthy.
4. Ease of transferability: Unlike a certification of ownership in a partnership, the tenants-in-common ownership has a greater degree of transferability. Each owner’s name is on the deed and is recorded. An owner’s interest can be sold, hypothecated, willed, or transferred without the consent of the other co-owners, and each owner has complete control of his or her interest. In evaluating collateral, lenders generally give more credence to an interest in a recorded tenants-in-common interest than in a limited partnership.
5. Economy of scale: Because investment dollars are being accumulated by a group, there are more dollars available to purchase larger properties. Many individual investors don’t have the opportunity to use the economies of scale unless they form a group. How does this concept apply to apartment complexes? If one unit is vacant in a four-unit complex, what would the vacancy factor be? If you said 25 percent you are correct. On the other hand, if one unit is vacant in a 40-unitcomplex, what would that vacancy factor be? Right, 2.5 percent.
Just think about it! When the carpet layer is called, to whom do you think the better square-foot price will be given, the owner of the 40-unit building or the four-unit building? The same applies to all vendors.
6. No mortgage or qualifying restrictions: Unlike most public limited partnerships, tenants-in-common ownership doesn’t have any restrictions for financing or investor qualifications. Financing can be structured to give the greatest flexibility to each individual owner either at the time of purchase or sale. The group is formed based on the needs and desires of its members not on standards imposed by governmental agencies. Individual owners don’t need a minimum or maximum net worth to invest. They’re not required to have someone attest to their capability of making their own investment decisions. Nor are they forced to have experts make these decisions for them.
7. Tax advantages: Using the tenants-in-common form of ownership, gives you the opportunity to become an active investor. As such, you can qualify for the $25,000 per year write-off against your salary, dividends, interest, and other income. This form of ownership provides the flexibility needed to implement the tax-saving strategies discussed earlier. Other forms of ownership satisfying only passive investor requirements do not have these capabilities.
8. Neither a real estate nor a securities license is required to form a private tenants-in-common group to invest in real estate. If you do not manage or control the group, it doesn’t have to be registered or qualified with any governmental
ABOUT THE AUTHOR: Eugene E. Vollucci, is a real estate advisor and Director of The
Center for Real Estate Studies, a real estate research organization in Torrance, California and co-author of "How to Buy and Sell Apartment Buildings" Second Edition (John Wiley & Sons, 2004). To obtain more information about Center for Real Estate Studies, please visit our web-site at www.calstatecompanies.com