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An Introduction to Tenancy in Common Investments

An Introduction to Tenancy in Common Investments

Picture this. You’re admiring a masterpiece in an art gallery. Everyone around you is equally engrossed; they’re appreciating the unique details and brush strokes that stand out to them.

This communal yet individual experience is the essence of Tenancy in Common (TIC) in the world of real estate; multiple investors come together with a unique piece of a singular property masterpiece.

Exciting, isn’t it? Join us as we take a deeper dive into the captivating realm of TIC investments. Are you ready for the tour?

1. A Slice of Understanding: What is Tenancy in Common (TIC)?

Tenancy in Common, often abbreviated as TIC, represents a form of ownership where two or more people hold an interest in a property.

Unlike a joint tenancy, where parties have an equal share, TIC allows for unequal ownership. This means one party could own 60% of the property while the other owns 40%.

Each owner has separate deeds, and in the unfortunate event of a demise, their share goes to their heir (not necessarily the other tenants).

2. The Irresistible Appeal of TIC Investments

two real estate investors discussing the potential of TIC investments

TIC investments present an innovative avenue for investors to wade into the real estate waters without diving deep into the complexities of solo ownership.

But what makes them so appealing to the modern real estate maverick?

2.1. Diverse Ownership Options: 

Unlike traditional property investments, where an individual or a single entity holds full ownership, TIC allows multiple owners to have a share in a property.

This means investors can own prime real estate (like a luxurious apartment complex or a sought-after commercial space) without shouldering the entire cost.

2.2. Flexibility in Investment Size: 

With TIC investments, you’re not confined by a ‘one-size-fits-all’ approach. Investors have the liberty to choose the size of their stake based on their financial capability and investment appetite.

2.3. Access to Larger, More Lucrative Properties:

Commercial real estate properties remain a distant dream due to the hefty capital requirements for many investors. However, TIC opens doors to such elusive deals by splitting the cost among various investors, making high-end properties more attainable.

2.4. Potential for Increased Cash Flow:

Since properties owned under TIC are often larger and in prime locations, they can yield significant rental income. And as every investor gets a share based on their ownership percentage, the potential for steady, robust cash flow is markedly high.

3. The Caveats: Challenges with TIC Investments

But as with any investment, there are considerations:

3.1. Conflicts: 

Without clear communication and a legally binding agreement, disputes can arise. Critical decisions regarding property maintenance, expenses, or even selling can become contentious.

3.2. Financing Difficulties: 

Traditional mortgage lenders might be wary of TIC arrangements. A default by one tenant could affect the property, making it riskier for lenders.

3.3. Market Limitations: 

TIC is more prevalent in specific markets. Some regions may lack the legal and real estate infrastructure to support such investments.

4. The TIC and Loan Tango: Real Estate Loans in TIC Investments

real estate loan experts crafting a custom loan for a team of investors

The dynamics of TIC arrangements interact uniquely with real estate loans. This relationship, akin to a well-orchestrated dance, can often seem intricate. Let’s delve deeper into how real estate loans play out in the world of TIC investments.

When you enter the world of TIC, you have to grapple with the concept of shared ownership. While this collective approach offers the appeal of shared responsibility and costs, it also ushers in complexities when securing financing.

Traditional mortgages are structured around single ownership, but TICs challenge this norm, requiring lenders to think outside the box.

4.1. Single Loan TIC Arrangements:

The single loan structure is one of the prevalent financing methods for TICs. All co-owners collectively obtain a single mortgage for the property.

While this might seem straightforward, it introduces an interdependency among the co-owners. Every participant is collectively responsible for the loan; if one party defaults, the others are on the hook to cover the missing payments.

This mutual liability can be both a boon and a bane. It promotes cooperation and trust among owners, but it also introduces potential risks if someone’s financial situation takes a downturn.

4.2. Separate Loan TIC Financing: 

To circumvent the collective liability of single loan structures, some investors opt for separate loan TIC financing.

In this scenario, each co-owner secures an individual loan proportional to their ownership stake. This approach compartmentalizes financial responsibility; it insulates investors from potential defaults by their counterparts.

However, it’s worth noting that very few lenders offer separate loan TIC financing given its unconventional nature, potentially limiting the pool of available financiers.

4.3. Interest Rates and Terms: 

Securing a loan for a TIC investment can sometimes come with slightly elevated interest rates. The reasoning is simple: lenders often perceive TICs as riskier due to the multiple parties involved.

4.4. The Critical Role of a TIC Agreement: 

When navigating TIC financing, a robust and comprehensive TIC agreement becomes invaluable. This legal document, agreed upon by all co-owners, delineates the responsibilities and rights of each party.

In the realm of financing, it can stipulate how loan responsibilities are divided, the course of action in case of a default, and the protocol for refinancing or adding additional encumbrances to the property.

5. Steps to a Successful TIC Investment

Successfully navigating the world of Tenancy in Common (TIC) investments requires a delicate balance of research, collaboration, and meticulous planning.

The first step on this journey is acquiring a comprehensive understanding of the TIC structure. Familiarize yourself with the nuances of shared ownership, the rights of individual tenants, and the intricacies of property management.

Once grounded in the basics, it’s essential to dive deep into market research. Identify regions or properties that align with your personal investment goals and those of potential co-tenants.

This is a great way to ensure all parties involved have a shared vision for the property’s future.

While scouting for properties, consider factors like future market potential, ongoing maintenance costs, and any legal restrictions or benefits associated with the property.

Securing the right co-investors is the next pivotal step. It’s akin to entering a long-term relationship. Trust, transparency, and shared objectives are critical.

Conduct thorough background checks, understand the financial standing of potential partners, and discuss long-term investment goals. The actions of one investor can impact everyone; make sure you have confidence in every participant’s commitment and capabilities.

With partners onboard, draft a robust TIC agreement. This document becomes the North Star for the investment; it details the rights, responsibilities, and protocols for every conceivable scenario.

From outlining procedures for selling shares or the entire property to defining how property management tasks are distributed, this agreement is the bedrock of a harmonious TIC relationship.

The financing dance then takes center stage. As discussed, TICs offer unique challenges and opportunities in the realm of real estate loans. Collaborate with a trusted financial advisor or institution familiar with TIC structures. This ensures that the loan structure selected (whether it’s a single loan or separate loans) aligns with the collective vision of the group while mitigating potential financial risks.

Finally, ongoing communication is the lifeblood of successful TIC investments. Frequently scheduled meetings or check-ins can ensure that all parties remain aligned in their objectives, address any emerging concerns, and adapt to changing market or property conditions.

Recommended Read: 8 Real Estate Investment Goals You Should Set in 2023

Start Working with InstaLend

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A successful TIC investment isn’t just about pooling resources to buy property. It’s about orchestrating a harmonious blend of research, collaboration, and strategic planning.

If you’re considering testing the waters and starting off with a real estate loan, you’re at the right place. InstaLend provides a wide range of real estate loans, including fix and flip loans, single-family rental loans, new construction loans, multi-family bridge loans, multi-family term loans, and more.

Apply for a loan today. If you’re not sure whether InstaLend is the right choice for you, check their reviews and portfolio to see whether their work meets your expectations.

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  • October 13, 2023
  • 7 min read
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