Frequent Questions

Q: You deal in a lot of out-of-state properties.  How can you know what a “good” property is?  Isn’t real estate all about “location, location, location?”

A: Yes, but…when discussing commercial real estate (as opposed to residential real estate) there are some important additional considerations to analyze. 

First, when you buy an investment property, you are actually buying a stream of income—both current income (e.g., during the first year of ownership) and future income (e.g., 5 or 10 years down the road….Looking beyond 10 years usually invites too much speculation to be worthy of serious analysis).  Specifically, when you buy an investment property, you are buying a certain quantity, quality, and durability of income.

The quantity of income from an investment property is easily measured by calculating the property’s Cap Rate (net operating income/purchase price).  You should always look beyond the simple Cap Rate formula, however, and go on to calculate your cash-on-cash return from the investment, which also takes into consideration the mortgage payments on the property and its impact on investor return.  Going one step further, and calculating the positive effects of the debt pay-down (amortization of the loan which is, in effect, being paid by your tenants), can show you the total current return that the property is generating for you on your invested equity.  Of course, there may be additional benefits that will accrue to you via interest and depreciation deductions, which can shelter from taxes a portion of the income received from the property.  This total return is perhaps the most accurate figure for purposes of comparing a prospective investment in income-producing property to other non-real estate investments.

The quality of the income stream is largely dependant on the tenants who pay you rent each month.  Larger tenants with successful operating histories, or smaller tenants with a strong local presence in their market can often add stability to the income stream you are expecting each month. 

Last, the durability of the income stream is primarily a function of the length and terms of the leases in place with your tenants.  Here, a decision often has to be made by the investor with respect to the trade-off between longer-term leases with smaller future rent growth, or shorter-term leases that may allow landlords to capture increases in market rents over time, but may offer less stability of income.

Investment properties with longer-term (e.g., 10-15 years) leases with stable credit-worthy tenants (generating good quantity, quality, and durability of income) can provide investors with decent longer-term returns despite lower-growth attributes or short-term fluctuations of local markets.  However, shorter-term leases in more robust areas may afford investors with more total return potential, perhaps at the expense of stability and higher-income in the earlier years.

It is this last point that connects back to our original question regarding location’s importance to a rental property.  The more variability there is in a particular property’s stream of income (e.g., shorter-term leases, less credit worthy tenants, etc), the more importance location and area demographics will play in an investment property’s future value.  If there is not adequate job or population growth to sustain an area’s local businesses or residents, then the future value of the property could be adversely effected as shorter-term (e.g., 1-3 year) leases expire. 

Most large metropolitan statistical areas (MSAs) have within them sub-markets with favorable characteristics—locations that tend to attract and retain residents, workers, and businesses in the area for longer periods of time.  As long as adequate time is given by the investor to ride out temporary but inevitable cyclical swings in the economy, selecting an income property in a good sub-market location can provide an investor with some longer-term protection from the vagaries of the economy and real estate cycles.

Q: How much control does one give up with a Tenant-in-Common investment?

A: As one of several co-owners, an investor may lose some autonomy with respect to decision-making on the property. Some key decisions affecting the property (e.g., negotiating or re-negotiating leases, hiring or firing property managers, securing or refinancing a loan, or sale of the property) typically require unanimous consent of all co-owners. Other decisions may only require a simple majority of co-owners for approval; in either case an individual owner is not the sole decision maker on issues affecting the property. In most cases, TIC ownership agreements are structured in such a way as to reduce the frequency and necessity of co-owners voting on key issues. It is important to remember, however, that as a co-owner one has the right to vote on decisions on the property¹.

It should be noted that it is the co-ownership structure itself which gives TIC owners many of the benefits that often escape sole-owners of smaller rental properties. Therefore, rather than "giving up control" of their investments, many TIC owners find that they actually gain more control over their lives, thanks to fewer management responsibilities and more disposable income, enabling them to enjoy the fruits of their hard-won and substantial equity positions.

Q: What kinds of fees or charges are involved with TIC properties?

A: Similar to other real estate transactions, purchasing a TIC interest involves several costs from different sources, among them: broker commissions, acquisition costs, marketing expenses, attorney fees, closing costs, and other fees. Though broken down and spelled out in a TIC property's offering memorandum, these costs are often bundled or built-in to the asking price that the TIC owner pays for the TIC property; therefore, any projected yields quoted are usually net yields which already take into consideration these costs. For example, if a TIC property had a first year projected cash return of 7%, and a TIC owner invested $1 million, the first year's income would be $70,000. This net income is inclusive of the sponsor's up-front charges and would not further reduce the TIC owner's yields¹.

In considering the overall costs associated with a TIC property, it should be noted that the sponsors who put TIC properties together for investors may provide numerous services. Among these services, may be: due-diligence research; the acquisition of the property; securing and having in-place financing at institutional terms; on-going property management; and, ultimately, providing guidance and more due-diligence with respect to the sale of the property.

Q: How liquid is an investment in a TIC? Can the investment be sold whenever an investor wants?

A: As a TIC owner one may retain the ability to sell or transfer TIC interests to another party. However, as with any real estate investment, if market conditions are unfavorable at the time an investor wishes to sell interests, there is no guarantee that an investor will find a ready buyer at the price he/she may want. Some TIC property sponsors have an "exit strategy" in place for the eventual disposition of the property, on behalf of the TIC owners. A multi-year holding period is a common time-frame within which many TIC properties are held. Upon sale of the TIC property, TIC owners are free to do what they wish with their proceeds, including another 1031 Exchange into a traditional single-owner property, or into another TIC property. There is no obligation to purchase a TIC from the same sponsor or to purchase a TIC property at all. An exchanger should consult a tax advisor for tax related issues¹.

Q: What is the availability of properties, and how long does it take to find a TIC property?

A: The Congdon-Jeffers Group works to maintain an ever-changing database of nationwide properties. Our contacts with national real estate companies and multiple TIC sponsors gives us access to a wide variety of properties diversified as to type, location, minimum investment size and debt-to-equity ratios¹.