TENANTS IN COMMON PROPERTIES
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"Twelve Common Mistakes Tenant in Common Investors Make"
Tenants in Common property is defined as a form of real estate ownership in two or more persons have an undivided interest in the asset, where the ownership shares are not required to be equal, where ownership interests can be inherited, and each co-owner has a separate deed.
The most common way to become a Tenants in Common co-owner is by purchasing an ownership interest from a T.I.C. Sponsor or Developer. A Tenant in Common Sponsor locates suitable real estate for the tenants in common property, arranges to purchase the TIC properties, performs and prepares comprehensive due diligence material and arranges for financing and the management of the tenant in common property.
Some of the advantages of Tenants in Common Properties are as follows:
Little to No Management: Tenants in Common property ownership allows the investor to leave the management to someone else and receive a monthly income. No management headaches are one of the most compelling reasons for purchasing TIC properties.
Diversification: Investors can spread the risk that is inherent in any investment, among a number of TIC properties. Risk management is the key to successful investing and diversification is one of the best means of managing risk. Diversification should be by geography, asset class (not everything in retail for example) and by risk category.
Certainty of Close: For 1031 investor's certainty of close is vital. Because a T.I.C.'s financing and due diligence are already complete the likelihood of a successful close is increased significantly over a conventional real estate transaction.
Plan B Value: For 1031 investors TIC properties are an excellent Plan B strategy. When trying to buy a conventional piece of real estate that can involve extensive and prolonged due diligence and financing contingencies naming one or more Tenants in Common properties as a Plan B can save the day. In effect an investor can extend the 45 day identification period to complete their due diligence on their number one choice. By naming a tenant in common property the investor can reduce the risk of a failed 1031 exchange.
Strength of Larger Properties: Investors can invest in larger properties than otherwise possible with the funds available. Frequently these larger properties have a better risk reward ratio because of stronger tenants, demographics etc. Owning a part of a $100 million dollar Class A Office Building with long term credit tenants can provide peace of mind over a small apartment building with management headaches.
Liquidity: Each T.I.C. investment is different when it comes to liquidity. Most commonly, the terms of the loan on the Tenant in Common property will determine if the investment is truly liquid before the entire property is sold (typically 5 to 7 years). T.I.C. investors need to check with the Tenant in Common Sponsor as to liquidity before they invest.
Increased After Tax Cash Flow: Buying into a larger property can increase the amount of depreciation that can be taken thus sheltering more income. TICs are an excellent way to invest in larger properties and avoid management headaches, increase cash flow and diversify.
Against the strengths listed above it is important that prospective T.I.C. owners be comfortable with the reduced control that is implicit in this form of ownership (there is the sponsor and other investors who have a say in what happens to the property).
Another potential negative is the lack of liquidity that has already been discussed and the associated fees that are incurred in this form of ownership.
Investors should look at the Tenants in Common option as a point of comparison to other real estate investment alternatives at the very least.
The ability to diversify and have management-free income is an exceptionally strong argument for Tenant in Common Properties that frequently outweighs any negatives.
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