What are Tenants in Common and How Do They Vary From Joint Tenants?
Entering the real estate investment world and hanging up your shingle as a landlord can be an exciting adventure. It can also be somewhat nerve-wracking. You know how it works by now, including these painstaking steps and some others.
- Researching the market
- Picking out the property
- Finding the funding
- Fixing up the property
- Finding the right renters
It's exhausting just thinking about it.
And it's because of this long laundry list that many investors join together. In fact, only 70% of rental properties are owned by individual investors, according to the Census Bureau.
And that's where tenancy in common and joint tenancy come in. This legal-speak refers to property ownership involving two or more people and the various ways you can hold title together. Of course, as legal terms, there's a lot more to it.
Let's cover the basics and help you determine if tenants in common or joint tenants is a better road to go from an investment strategy. And, while we're at it, let's explore joint tenancy as it relates to renters.
Tenants in common
Some of the key features in tenancy in common include the following:
- Can own unequal shares: Two or more people own shares in a property. These shares may be equal or unequal. For instance, Mike may own 25% of the property, while Mary owns 75%.
- No right of survivorship: If one of the owners dies, their interest in the property does not transfer to the other owners. Instead, it goes to the beneficiary named in the deceased's last will and testament. This is one of the key benefits of tenancy in common for investors who want to leave their share of the property to someone other than another owner.
- Can sell their shares: Tenants in common can sell their share of the property. Mike wants out and sells his 25% of the property to his cousin. Now, Mary owns the property with someone she may not know or, worse, may not like.
- Hold the title individually: Partners hold the title for their portion of the property. These agreements can be created at any time. This means a new investor can jump on the bandwagon years down the road without having to write up a whole new agreement. Mary wants to sell half of her stake to her sister. No problem. Hopefully, Mike feels the same way.
As an investor, you may consider a separate agreement that gives you the first right of refusal should other investors decide to sell.
Tax time: Even though individual investors may own varying percentages of the property, tenants in common cannot claim ownership of any particular part of the property. Therefore, at tax time, most jurisdictions send a single property tax bill instead of separately assigning a portion of the bill based on the percentage owned.
By comparison, the following represent key distinctions found in joint tenancy.
- An equal partnership: Two or more people share an equal interest in the property. Now, Mike owns 50% of the property, and Mary owns 50%.
- Right of survivorship: If a partner dies, the remaining investors inherit their share of the property.
- Selling their shares: If one investor sells or transfers their interest, it's converted to a tenancy in common for all parties.
- Take the title simultaneously: Owners must acquire the property simultaneously and acquire the title under the same document.
- Delays the estate tax: Should Mike die, Mary inherits Mike's interest with no estate tax owed.
The pros and cons of tenants in common
As you can imagine, investors look at the pros and cons of an ownership structure differently. What's a plus to one person can be a drawback to another. Therefore, consider the following in light of your unique situation.
Pros of tenants in common arrangement
The obvious benefit is investing in real estate with some support. A fellow investor makes it easier to enter the market, dividing up payments and maintenance costs and helping carry the weight should the property sit vacant for a spell.
For those who want to leave their portion of the property to a family member, the rule regarding survivorship is a big plus.
Should one of the partners be unable to carry their weight and stops paying their share of the mortgage loan payment, the other partners are responsible for covering the total payment.
Joint tenancy as it relates to renters
Not to confuse you, but there's another "joint tenancy." This type of tenancy occurs when people rent a property together.
As a joint tenant, each of you carries the same responsibilities. You are also liable for the entire rent, even if "your share" is only half. So, let's say you rent an apartment with your best friend. Should they lose their job and cannot pay rent, you are still responsible for the entire amount.
Similarly, if you rent an apartment with a friend who damages the property in any way, you're both liable. One course of action in these situations is to sue them for the money they owe in small claims court. Unfortunately, it's a surefire way to lose a friend, which brings us to some tips that can help you out before you end up regretting your roomie situation.
- Choose your roommate wisely. While that sounds like unneeded advice, it's common for friends to get excited about living together before seriously considering the consequences. If your best friend and potential roommate leans toward the careless side, you may want to reconsider.
- Write up a roommate agreement. While this suggestion sounds very lawyerlike, it's a good idea to put a list together of who's responsible for what during the early stages. That way, you'll have a paper trail that, hopefully, you'll never need.
Choosing the right legal arrangement
Whether tenancy in common or joint tenancy is a better option depends on your unique situation. Weighing the pros and cons can help you gain the greatest legal protection while safeguarding your property.