Tenancy In Common: Your Guide To This Form Of Co-Ownership
Have you dreamed of taking the plunge with a new investment property? But maybe you don’t have the cash yet. Stop waiting for your next big raise, and get a jump on real estate investing. With tenancy in common, it’s possible to co-own a home with friends, family, or like-minded investors. We’ll walk you through the key parts of tenancy in common:
- Tenancy in common defined
- How to get started with your TIC (with examples!)
- Determining if tenancy in common is right for you
- How to get out of a TIC agreement if it’s not working
Tenants In Common Defined
Tenancy in common (TIC) is a form of property co-ownership. Two or more parties own a percentage of residential or commercial property. Their stakes in the property are not necessarily equal. If a co-owner dies, their stake in the property goes to whomever they leave it to in their will.
How Tenancy In Common (TIC) Works
Typically when you enter a co-ownership agreement like tenancy in common, you define the percentage of the property that you own. This percentage is put officially on your property deed and mortgage.
While you may own a larger or smaller stake in a property, your access and privileges to the property remain the same. Many people who enter a tenancy in common agreement will create an additional agreement beyond the mortgage that outlines how owners will use the property.
Over time you may want to change how ownership is distributed in your TIC agreement. You can bring in additional owners and change the agreement.
Survivorship is also unique with tenancy in common. If a person dies, their stake in the property goes to their heir. In other forms of co-ownership agreements, the stake gets redistributed among other owners.
What is an example of a tenancy in common?
John, Sally, and Bruno decide to buy a property together. They all want to invest in real estate but can’t afford to buy a property alone. They intend to use the property as a vacation rental to generate money.
When they buy the property, all of their names are put onto the title and mortgage. Each TIC member owns a different percentage of the property: John (20%), Sally (50%), and Bruno (30%).
Though they own different stakes in the property, they agree to split access and proceeds from their vacation rental business equally. TIC is a form of fractional investing.
Unfortunately, Bruno passes away. His two children inherit his stake in the property. His shares are split into two equal shares for his children according to his will. So they now own 15% of the property each.
What Is The Primary Difference Between Joint Tenancy And A Tenancy In Common?
There are several types of co-ownership agreements (we break them down here). Joint tenancy and tenancy in common are typical agreements between two people who are not related or married.
Joint tenancy has a few key differences from TIC:
- Right of survivorship: With joint tenancy, the ownership of the deceased co-owner is distributed to the remaining owners. It does not go to the deceased member’s heir.
- Equal ownership: With joint tenancy, members own equal portions of a property. Tenancy in common offers flexibility with ownership percentages.
Pros And Cons To A Tenant In Common Agreement
There are many advantages and disadvantages to a tenant in common agreement. We’ll break down what to consider in a TIC agreement and co-ownership in general:
Pros of a tenant in common agreement
- With a TIC agreement, you can own a fair stake in a property. For example, if you paid for 75% of the property, you can own this much. This is different from a joint tenancy where all parties own equal shares.
- You decide who inherits your share of the property after you pass away. With other forms of co-ownership, the property might go to the other co-owners instead of your heir.
- You have the flexibility of ownership. You can add or subtract owners as you need to with a tenant in common agreement.
- Co-ownership agreements allow you to afford more. You split the mortgage and can also qualify for larger loans.
- You are taking on a lower risk because you’re splitting the investment.
- You can start building equity earlier in life with a real estate purchase.
Cons of a tenant in common agreement
- You are liable for all mortgage payments, even if one of the members of your agreement stops paying. If you don’t pay, your credit score will be affected. You could also go into foreclosure.
- If someone in the agreement dies, their ownership goes to their heir. So you have no control over who enters into a tenant in common agreement in the event of death.
- One tenant can force the other members to sell.
- When you apply for mortgages, the member with the worst credit score typically sets the rates for the group.
What Are The Responsibilities Of Tenants In Common?
Tenants in common are responsible for the same things that traditional property owners are responsible for in owning a property. These responsibilities include mortgage payments, property taxes, HOA fees, home repairs, and more.
The difference is how these expenses get paid. Will you divide each of these expenses evenly? Will it be based on ownership percentages? It’s essential to define the responsibilities before entering a tenancy in common agreement.
Dissolving a Tenancy in Common Agreement
There are several ways to terminate a tenancy in common. Though you will need to check with a lawyer how laws vary by state, you generally have several options. We’ll break those down below.
Agreement
If you choose to dissolve through an agreement, you are ending a co-ownership that everyone agrees. This can be easy if you have a piece of land. The land can be divided into proportional parcels. But this can be tough in other instances. For example, it’s hard to divide up a house.
Court-ordered partition
If you can’t agree, then you may need to get the court involved. A court-ordered partition allows the court to divide up your property. The court will either divide your property or say that you must divide through the sale of a property.
Division by sale
This might be the easiest way to get out of a tenancy in common. You sell the property and divide the proceeds based on the ownership percentages. Sometimes owners do this on their own, and other times this is court-ordered.
Ousting a tenant
You can oust a tenant from a tenancy in common agreement through the courts. But be prepared for litigation. It’s much easier to use some of the other techniques listed and use this as a last result.
Give up interest
This is the most common way to get out of a tenancy in common. You can give up your interest in the co-ownership. The tenancy in common will still exist (so technically, it isn’t dissolved), but it is relatively easy to do. You can sell your share to another person, leave it to someone in your will, or gift it to another person.
Is Tenancy In Common Agreements A Good Investment Choice?
It depends. A tenancy in common agreement is a way to invest in real estate. Real estate is a great way to grow your wealth. A co-ownership agreement, like a TIC, can help you gain entrance to the market, which may have otherwise been too expensive.
The key is to evaluate who you go into business with with a tenancy in common. Because you’re tied together on mortgage payments, it’s essential to ensure the other co-owners can pay their monthly bills on time. It is also helpful to develop an agreement on how the group wants to use the property, so everyone is on the same page.
FAQ: Tenancy In Common
What type of loan is best for tenancy in common?
A conventional loan is best for a tenancy in common. Your mortgage lender will include all co-owners names on the loan. It is difficult for all members of a tenancy in common to qualify for more specialized loans like FHA and VA loans.
Is tenancy in common a good idea?
It depends. Tenancy in common alleviates some of the risks of owning property because you share the burden with others. But it’s only a good idea if you have a solid agreement between all parties.