As we all know, one of the biggest barriers to real estate investing is financial resources. But what if we told you there’s an option where you simply contribute what you can, with shares and profit divided proportionately to what you have to offer. That’s called tenancy in common. Wondering whether it’s the right choice for you? Find out the answer to, “what is a tenant in common in real estate” and what its pros and cons entail. Let’s begin!
Key Takeaways
- Tenants in Common (TIC) is a type of flexible shared ownership where investors are allowed to hold unequal percentage shares to own a property with one or more co-investors.
- Investors in a tenancy in common agreement get to enjoy independence and control, allowing them to handle their investment shares as they see fit.
- Some of the risks involved in TIC include shared expenses, especially debt and taxation-related ones, (often under joint and several liability), potential disagreements and conflict between co-owners, as well as forced sale actions.
What Does “Tenants in Common” Mean in Real Estate?
When it comes to real estate investment, it’s not so often that an individual investor can purchase a property straight up. That is why rental property companies introduce investors to alternative strategies, such as tenancy in common. But what is a tenant in common (TIC) in real estate exactly?
With Tenants in Common (TIC), multiple parties hold a percentage interest in a property as a form of shared ownership. In other words, two or more investors can jointly own real estate – whether it’s a building structure or a piece of land. Investors can divide the percentage of ownership can be divided equally or unequally. However, everyone has equal rights to use the entire property regardless of whether they have a small share. This is because the idea of tenancy in common is that owners share possession, not the actual physical structure.
Another key defining characteristic of tenancy in common involves the matter of inheritance. Unlike other forms of shared ownership, if a co-owner dies, their shares do not automatically transfer to other shareholders or co-owners (also known as the right of survivorship). Instead, their percentage interest becomes part of their estate. This means that the inheritance is dictated according to their will, trust, or applicable state laws on the transfer of property after their death. On top of this, a tenant in common also has the right to sell, transfer, or mortgage their share if they decide to do so without the need for consent from other property owners.
How Tenants in Common Works (Step-by-Step)
Knowing the answer to, “what is a tenant in common in real estate investing” is one thing. But truly knowing the ins-and-outs of how these agreements work can help you decide if you want to enter such an agreement. To give you a better idea, let’s take a look at how the process works if you buy a property through a TIC setup.
First, you start by coming together with all interested parties to determine the specific ownership shares for each one. Since TIC does not require equal ownership, each investor can simply state how much they want to contribute to determine their percentage shares. This will also be the basis for defining profit splits and voting rights. Once everything is settled and agreed upon, you need to draft the tenancy in common agreement. This will put the details of your agreements into legal writing, which you can use in decision-making and in disputes.
Then, there comes the tedious process of securing the financial resources needed for the investment. Most commonly, tenants in common enter joint mortgages, which list all of the investors under the same loan. However, you also have the option to simply secure an individual loan to finance your contribution. Once you’ve finalized the financing, the tenant-in-common agreement is recorded, reflecting all of the owners on the deed and their corresponding percentage share of the property. From here on, co-owners determine their property management responsibilities (or get property managers to handle them), split the income revenue proportionate to their share percentage, and execute their exit strategy.
Tenants in Common vs Joint Tenancy
When we talk about tenants in common (TIC), a question that commonly comes up is how TIC compares and differs from joint tenancy. Although both are forms of shared ownership, there are significant differences between how agreements are established. With this in mind, here’s a quick look at tenants in common vs joint tenancy:
| Tenants in Common | Joint Tenancy |
| Allows unequal shares between co-owners | Requires an equal split of shares among co-owners |
| Can pass their percentage share to heirs or beneficiaries | Ownership transfers to the remaining co-owners |
| Have the option to sell, transfer, or mortgage their shares independently | Property decisions must be consensual and unanimous |
| Profits are divided proportionally | Equal split among co-owners |
Pros of Tenants in Common for Investors
In order to make a more informed decision on whether to get into a tenancy-in-common agreement or not, you need to understand what its benefits are. Let’s take a closer look.
First and foremost, TIC offers flexibility in a way that investors can contribute different amounts (unlike a joint tenancy). So, you can still get into a tenant-in-common agreement even if you can only provide 10% and other investors cover the rest. This provides you with a great opportunity to access larger assets and gain profit proportional to what you put in. In a way, this also allows you to diversify your portfolio by purchasing smaller shares in multiple properties instead of just putting it all in one.
Aside from these, tenancy in common also can give you more independence. Since shares of the property are separate and independent from one another, you can sell, transfer, and even mortgage your part without having to ask and get permission from your co-owners. Therefore, you have full control over your investment – whether you want to sell your shares as an early exit strategy, transfer them to another investor, or even gift them to someone else.
Then there’s the matter of revenue generation. The good thing about TIC is that it establishes fairness as you can split your rental income according to your percentage shares. Other than income, you can divide the tax benefits and depreciation allocations based on your stake ownership.
Risks of Tenants in Common
At times, benefits can blind you from the drawbacks and challenges that can put your investment at risk. To prevent this from happening, let’s talk about the cons of tenants in common agreements, starting with the risks of shared liability. Other than income, another aspect that co-owners in tenancy in common share is the joint and several liability over the mortgage and taxes. While people usually split their liability for repairs, insurance, and maintenance by their share in the TIC agreement, you will need to cover these costs, even if someone else falls behind or defaults.
In practice, this means that a lender or taxing authority can pursue any individual co-owner for the entire amount they owe, regardless of your percentage share. Meaning, if one investor cannot pay their required 20% of the mortgage, the bank can demand the full 100% payment from you. That leaves you to pursue the defaulting co-owner separately for their share.
Then there’s the possibility of conflict between co-owners regarding how to manage or operate the property. These disagreements, whether big or small, can create tension and fracture your relationships. In turn, that makes your management even more challenging.
Speaking of business, tenants in common can put you in difficult situations. For example, a co-owner filing for a partition action, or a court that orders it, can force you to divide the physical property. Or, worse, it might force you to sell even if you don’t want to. Another possibility is when a co-owner decides to sell or transfer their share, and you’re left to deal with a new, unwanted co-owner.
A Few Final Notes
In Texas, the information we provided here only applies to investors who are not married to their co-owner. If you’re married with your co-owner here, you should know that Texas law instead uses the Community Property system for married people. If you’re a married co-owner, you should consult your legal counsel regarding Community Property and specific survivorship agreements.
Speaking of which, we’re only providing general information in this article for educational purposes only. While we aim for accuracy and reliability, the information shared is not meant to be relied on as legal, tax, financial, or specific regulatory advice. We strongly recommend that you always consult with a licensed attorney, CPA, or other qualified professional in your specific jurisdiction for advice tailored to your unique circumstances, as reading this blog does not establish a client or advisory relationship with BMG.
Make the Most of Your Investment with BMG
For investors, entering shared ownership through a tenants-in-common (TIC) agreement can be a strategic approach that will lower the upfront cost and open doors for larger real estate investment opportunities. Tenants in common can give you flexibility in terms of your contribution, accessibility due to lower upfront costs, and independence in handling your shares and executing your exit strategy. However, there are also risks to consider, from shared liabilities to co-owner disagreements.
To really minimize risk, we recommend partnering with real estate management companies near me like us at Bay Management Group. Our team of professionals can handle your rental’s legal compliance, leases, repairs and maintenance, tenant concerns, marketing, and more on your behalf. That way, you can minimize your risks and avoid headaches. Ready to take your investment to the next level? Contact us today!