Tenant in common (TIC) is a popular co-ownership structure for real estate investments. Under TIC, each co-owner owns a percentage of the property. When a co-owner dies, their share passes to their heirs, not automatically to the other owners. TIC provides more flexibility in estate planning compared to joint tenancy. However, it also comes with some downsides. This article will analyze the pros and cons of TIC investments and provide suggestions on how to best utilize TIC structure to optimize investment returns.
TIC allows customized estate planning to transfer ownership shares
A major benefit of TIC is the ability to customize estate planning. Under TIC, co-owners can leave their percentage ownership to anyone through a will. This provides more flexibility compared to joint tenancy where deceased owner’s share automatically goes to the surviving owners. With thoughtful estate planning under TIC, co-owners can transfer ownership shares to their desired heirs in the future.
TIC enables bringing in co-investors more flexibly
TIC structure also makes it easier to bring in new co-investors over time. New co-owners can purchase a share of the property from existing owners. And existing owners can sell just a portion of their shares. This level of flexibility is not available under joint tenancy. As a real estate investment becomes more valuable over time, TIC structure allows owners to access that value by selling parts of their share.
However, TIC has complexities if an owner files bankruptcy
A downside of TIC is complications arising from an owner’s financial difficulties. If one owner files for bankruptcy, their share of ownership can be auctioned off to pay creditors without input from other owners. And the new owner may not be cooperative with existing TIC owners in managing the property. With joint tenancy, other owners automatically inherit the bankrupt owner’s share.
TIC may limit financing options compared to sole ownership
Some lenders view TIC properties as higher risk compared to properties under sole ownership. This is because lenders consider the financial strength of all co-owners when providing a mortgage to TIC properties. As a result, lenders may offer higher interest rates or refuse financing altogether to a TIC property.
Utilize TIC optimally by clarifying owner rights and property management upfront
While TIC offers more customizability for co-ownership investments, proper planning is vital to avoid potential pitfalls. Investors should sign a clear legal agreement upfront detailing ownership percentage, property rights, responsibilities in case an owner files bankruptcy or passes away, and rules regarding selling ownership shares. A property management plan outlining operating budgets, reserves, maintenance duties and dispute resolution procedures should also be established.
Tenant in common provides more flexibility for co-owned real estate investments through customized estate planning and transferability of ownership shares. However, a clear legal agreement and property management plan is vital. With proper planning, investors can optimize investment returns through efficient leveraging of TIC structure.