By Diana Hill, Online Trading Academy Real Estate Investor Instructor
As the subject matter expert on real estate for Online Trading Academy, my goal is to provide you with an insight to the asset class of Real Estate. Many of you think of real estate only in the context of either residential or rental property. In this article, I'll introduce to you a couple ways of getting involved in real estate that are completely hands-off.
If you want to balance your portfolio with real estate and are looking for the benefits of real estate ownership without any of the responsibilities or hassles, here's what we've got for you. As a passive investor, you'll find Real Estate Investment Trusts (REIT's), Real Estate Partnerships and Tenant-in-Common (TIC) Properties very interesting.
In this article, we'll concentrate on TIC's. TIC's are controlled by managers who make all the day-to-day decisions leaving you, as the investor, to simply cash your monthly checks.
Tenant-in-Common Properties are defined as property that is owned by a group of individuals who each have an undivided interest in the property. In other words, each individual is actually on title to the property and owns a fractional interest in the entire property based on their investment amount. For example, Mary might own 10%, Sally 15%, Gene 31 ½%, Fred 7 ½% and so on. At one time there were lots of questions as to how TIC investments should be structured and how many people could be involved in ownership. IRS revenue procedure 2002-22 gave TIC's some rules and guidelines. The IRS procedure indicates that TIC's can have up to 35 different owners and if structured properly, can qualify for a 1031 Exchange. The 1031 Exchange option is extremely exciting and will be the focus of a future article. Back to the TIC. The goal of most TIC's is to hold the property for 5 to 7 years and then sell at a substantial gain. For the investor who wants a monthly cash flow without management responsibilities, TIC's make a great deal of sense.
Advantages to Investing in TIC's:
- TIC's are great for people who are tired of being landlords but still desire the benefits and safety of real estate ownership. Rather than selling their properties outright and paying a huge amount of capital gains, they can 1031 exchange the entire sales proceeds into a TIC, and defer the tax.
- A TIC gives the investor many different types of properties they can purchase such as apartment complexes, commercial office buildings, malls, multi-use facilities, etc. Tenant-in-common properties offer great flexibility.
- TIC's allow an investor to diversify property ownership into other areas of the country where the real estate market and growth potential might be stronger than in their own backyard, with no management concerns.
- A good TIC sponsor who is selective about the prices of properties they pick can provide an opportunity for the investors to obtain a very healthy return on their investment even in a weak real estate market.
- Most TIC Investments qualify for funds that are invested in IRA's, 401K's, etc...
Due Diligence for TIC Investments
TIC investments can be very beneficial and offer the investor a commercial-grade real estate that is normally out of reach for individual investors. As with all real estate, you must do your due diligence. Here are some tips in helping you choose a company that will meet your expectations and limit your downside:
- Invest with a company that has a great track record. A track record is not a guarantee of future performance, but it's a good indicator.
- Don't invest with a company that does not provide audited financial statements. An independent financial audit needs to be prepared and distributed on an annual basis to the investors.
- Invest with a company that stays active as an owner alongside you the investor. A responsible TIC sponsor will retain a percentage ownership of the property as well as provide property management.
- Invest with a company that has owners who are both strong financially and are willing to sign the recourse carve outs. Most commercial loans are non-recourse loans which means if the bank forecloses on the property, they can only take the property back, not come after the owners for a deficiency judgment. But often banks want someone responsible if there was fraud or mismanagement. This is where the sponsors of the TIC should be willing to sign the recourse carve outs.
This is just a small sampling of the advantages and what you should look for when getting involved in a TIC.
My passion is to help you find the best vehicle in which to diversify your portfolio into real estate. I hope you see that you don't have to get your hands dirty to benefit from this asset class.
Have a great day.
- Diana Hill
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