Sometimes also called syndications or TICs, tenant-in-common investments are ways to own pieces of real estate assets. Instead of buying a small asset by yourself, a TIC allows you to pool your money with up to 34 other people to buy a larger asset. While TICs give you the advantage of being able to own a larger and higher-quality asset with the potential for diversification through having more tenants, they also have some significant drawbacks.
Owning a TIC
When you buy a TIC, you own a piece of real estate. However, many of them are structured by large companies that sit between you and the property. The company, or syndicator, typically handles the management of the property and sends you statements on the property's performance and distributions of the property's profit. Some even execute a master lease, where they lease the whole property and pay you rent while they collect, and keep, the rent from the tenants. If the property's income increases, they may keep the profit, while if the property's income drops, their master lease can help to insulate you.
Capital and Qualifications
One of the biggest benefits of a TIC is that you can buy a piece of a large asset even if you don't have the money to buy the entire asset. While a $100,000 down payment might just barely be enough to buy a small rental home, if you put $100,000 into a TIC, which is a common minimum investment. you could end up with a small piece of a 200-unit Class A apartment complex. In addition to having the money to invest, you will also need to meet the Securities and Exchange Commission's requirements to buy TIC shares. While a TIC is a real estate ownership interest, it also falls under the SEC's purview, since it is treated as a security. Since TICs are sold as unregistered securities, TIC buyers must meet the SEC's net worth requirements under Regulation D. One of the key requirements of Regulation D is that you must have a net worth of at least $1 million, excluding the value of your personal residence.
TICs and 1031s
TICs are a popular option for investors who are attempting to complete 1031 exchanges. (A 1031 exchange is a transaction where you sell real estate, buy more real estate and defer paying capital gains taxes. Since TICs are frequently structured to be passive, they are excellent options for investors that want to get out of active real estate ownership but don't want to pay the taxes to sell out of their real estate.
TICs can be excellent investment opportunities, but they are not without their risks. They can be extremely illiquid, with agreements that allow the syndicator to tell you when you can sell. TIC investments also contain generous fee structures that ultimately limit the amount of return that is available for the end investor. Finally, having a syndicator sit between you and the property can lead to trouble if the syndicator falls into financial trouble and cannot meet his obligations to you. As such, it's important to have a trusted financial adviser review any TIC investments with you to ensure that you fully understand all of the risks that they present.
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