Ownership Interest In A Property Explained
When you own a property, you have certain rights and responsibilities. When you are a single, individual owner, those rights are pretty straightforward. You can use the property the way you want to (as long as it’s legal).
But say you’re sharing a property with other people– maybe you decided to invest in a new investment property with friends or family. What are your rights? How are your rights separate from the other co-owners?
We’ll break down everything you need to know about ownership interest in real estate so you understand your rights as a property owner and the many ways to own a house or property. From there, we’ll explain what rights come with ownership interest.
Ownership Interest In A Property, Defined
In simplest terms, “interest” in a property translates to a “right to” the property. You have the rights to the property because you own it.
Even if you own a portion of the property, you still have rights to the property. This is especially important for investment properties regarding personal use and your share of the profits. (We’ll break this down more below.)
The Types Of Ownership Interest In A Property
In today’s world, there are a variety of ways to own property. Let’s look at the types of ownership interest in residential and commercial real estate.
Sole Ownership
Sole ownership means that one person owns the entire property, and they have the full ownership interest in the property. In most states, you can only pursue sole ownership if you are single or legally divorced. But in other states, it may be legal for you to acquire property separate from your spouse. (Check with your state’s regulation to understand which applies to you.)
Joint Tenancy
Joint tenancy is the most popular form of ownership interest for married couples. With joint tenancy, all owners have an equal ownership interest in a property.
If someone dies, the remainder of the ownership interest is transferred to the remaining owner(s). People like joint tenancy for the simple and straightforward survivorship process.
Tenancy By Entirety
Tenancy by entirety (TBE) is another option for married couples. With TBE, a couple is viewed as one legal entity. This single legal entity owns the entire property. Each person owns 100% of the property as a collective unit.
Tenancy In Common
Two or more people can own a property with tenancy in common. They can own different percentages of the property, and it is not always equal.
Tenancy in common is also different from the previous types of ownership interests because of how survivorship is structured. When a co-owner dies, their share of the property goes to their designated heir. It is not reabsorbed back to the existing owners.
Owning Trust
A real estate trust puts a trustee in charge of managing real estate for a trustor or trustors. So you are essentially asking someone else to manage your real estate assets on your behalf.
There are two types of owning trusts: irrevocable and revocable trusts. When you’re part of an irrevocable trust, you require the beneficiary’s permission before making changes. With a revocable trust, the trustee does not need the trustor’s permission for real estate decisions.
Owning Partnership (LLC)
An owning partnership through a limited liability company (LLC) allows investors to co-own property as an LLC. LLCs help protect your personal assets and can be beneficial in regards to taxes. (You can read more about multi-member LLC for real estate here.) When you invest with Getaway, you are purchasing shares of interest in an LLC which owns the rental property.
Owning Corporation
Similar to LLCs, owning corporations helps protect owners’ assets in the event that they get sued. You own your real estate property through a corporation. Corporations and LLCs have different pros and cons regarding liability protection and taxes. But they both shield you from risk.
How Does Ownership Interest In A Property Work?
The term “interest” often comes up in the real estate industry. It can refer to the rates you pay on a loan, but ownership interest differs.
With ownership interest, you have a right to use a property or the economic interest (i.e. right to income produced) if the property is being used as an investment rental property. With sole ownership, your ownership interest is simple. You get a right to the whole property. But it can become complicated if a group owns a property. You can actually divide up the rights to the property among the group. You must define each owner’s interest in the property if you decide to own a property together.
Properties are used for many reasons: living, vacationing, renting, investing, building, and more. If you’re part of a multi-owner property, there needs to be a legal agreement on how the property is used and how the income and appreciation is distributed amongst the owners.
Special note on security interest
Most people do not own their properties outright and instead are the partial owner through a mortgage. Your bank has a security interest in your home until you pay off the mortgage. For example, if you stop paying your mortgage, your bank can use its security interest to sell off your home if it’s in foreclosure. So don’t forget the bank still has some interest in your house while you are still paying off your mortgage.
What rights come with ownership interest?
Ownership interest is multi-faceted. There are certain rights that you have as an owner. If you are the sole property owner, your rights are relatively straightforward. But if you’re the partial owner of a property, then you need to outline each owner’s right in an ownership operating agreement very clearly.
Here are the different ownership interest rights:
- Right of possession: This is the legal right to own a property. What percentage of the property is yours if you are the partial owner?
- Right of control: You have the right to use your property as you want. However, you must follow all local laws, including zoning and HOA covenants. What level of access and use do you have if you’re a partial owner?
- Right of exclusion: You have the right to decide who enters your property. Who decides who gets access and when?
- Right of enjoyment: You have the right to enjoy your property legally. If you’re a partial owner, what level of access, if any, do you have to your property?
- Right of disposition: You have the right to sell your property if you own the title. How will you sell your portion of the property if you’re a partial owner?
What responsibilities come with ownership interest?
Owning a house gives you rights, but you also have responsibilities as an owner. The responsibilities of homeownership include maintenance of the property, HOA fees, insurance, and property taxes.
Can you transfer an ownership interest in a property?
There are several ways to transfer an ownership interest in a property to someone else. Depending on your type of ownership, options for transferring ownership will be defined by the properties operating agreement. Oftentimes, the easiest way to transfer a deed to someone else while you’re still alive is to use a quitclaim deed. Quitclaim deeds allow you to transfer the title to a new person or entity rather than a sale, but check with your lender before pursuing as there are often terms in mortgages restricting the transfer of title. Another common way to transfer ownership is through survivorship using a will. Be sure that your ownership agreements allow for this in instances where properties have multiple owners. Consult a real estate attorney or title company to see what works best for your situation and local laws.