One of the lesser known ways of buying and owning real estate is as “tenants in common”. This form of ownership allows more than one person to take an undivided interest in a specific piece of property.
For example, let’s say that you wish to purchase 100 acres of land, but you do not have enough cash of your own. However, you do have a couple of friends who would also like to invest. You and your friends agree to purchase the property. In addition, each of you will be investing a different amount of money.
The price of the 100 acres is $100,000. You will invest $25,000, your friend Bob will invest $25,000 but Paul will be investing $50,000. As tenants in common, you and Bob will each own a 25% undivided interest in the property and Paul will own a 50% undivided interest in the property.
An undivided interest means that you can’t pick out 25 acres of land and resell them as a separate piece of property, but you can sell your 25% interest to another buyer, and you won’t need Bob or Paul’s permission to do it. Each tenant in common can sell their entire interest in the deal, but the property remains intact. The new buyer simply becomes a tenant in common. In the title, each owners share of ownership is expressed as a percentage, so in our example the deed would actually state that you own a 25% interest, Bob owns a 25% interest, and Paul owns a 50% interest.
Tenants in common is recognized in the vast majority of states as a legal form of ownership, and can be a great way to purchase an investment property while retaining your individual rights to sell, and avoid being encumbered by a partnership or other business entity.
You may wish to form your own LLC or other entity for the purpose of personal asset protection, and your individual entity can own the undivided interest in the investment. Check with a local real estate attorney to discuss your specific situation and needs. But either way, tenants-in-common can be an excellent tool for purchasing a property as a group while retaining the flexibility to sell if you so desire.
There is no “right of survivorship” with tenants in common, so if you die, your interest in the property passes to your heirs. The remaining co-owners do not retain any share of your ownership unless you specifically bequeath it to them in your will.
The income generated by the property passes to the owners in proportion to their share of ownership. If the property generates $30,000 in income over the next year, you and Bob will receive a check for $7500 each, and Paul will receive $15,000. Each tenant-in-common is also responsible for their proportion of the expenses such as property taxes and insurance.
The major advantage of tenants-in-common as an ownership strategy is to allow two more persons to achieve goals that one person could not accomplish alone. And the flexibility of being able to sell your interest without affecting your co-owners can be very handy if the need to sell arises.
When considering this type of ownership method, the co-owners should have a contingency plan for addressing some issues that might arise during ownership:
1. What happens if a co-owner fails to pay their share of ownership expenses?
2. The co-owners should be in agreement as to how the property is to be operated, and spell out what procedure will be used in the event that there is a disagreement in the future.
3. How will any future disagreement over the selling price, terms of a sale or when to sell.
It is best to consult an experienced real estate attorney to help address such issues so that there will be a procedure in place to help deal with these issues should they become a problem.
How about that dream vacation home you’ve always wanted? Owning a nice vacation home can be pretty expensive for an individual, and you may not be using it all that much. But if you know a few other folks who would like a home in the same location, you could use a tenants-in-common strategy to purchase it and share the use of it proportionally, sort of like your own privately owned time-share.
When used properly tenants-in-common can be an excellent way to use different “partners” for different properties, and allow everyone the flexibility to make personal decisions about their particular interest in the property.
Editors Note: The information in this article is based on Georgia real estate law and this article references information found in the manual “Georgia Real Estate, An Introduction To The Profession, By Charles J. Jacobus and Bruce M. Harwood. If you live in another state, check to make sure “tenants in common” is a recognized form of ownership.
Donna S. Robinson is a real estate investor and investing coach located in Atlanta, Ga. Follow her on twitter at donnaconsults or check out her blog at www.RealtyBizConsulting.com