WHAT IS A TIC?

TIC is an acronym for Tenant-in-Common, and it refers to a form of real estate ownership. Specifically, when one buys a TIC interest, one is buying an undivided, fractional interest in a typically larger property. Today, when we talk about TIC investments, we are generally referring to an investment where several unrelated parties invest together as co-owners, pooling their resources to buy a larger property which may possess advantages often unavailable to single-owners of real property. As an example, 10 investors may decide to pool their resources together to purchase, say, a $10 million property occupied by Home Depot. If each investor put in $1 million, then each would own an undivided 10% interest in the whole property. It should be noted, however, that there is no obligation to purchase equal interests. For example, one investor may invest $500,000 and own a 5% interest in the whole property; another may invest $2 million and own a 20% interest, and another investor may invest $100,000 and own a 1% fractional interest.

ADVANTAGES OF TICS

Why would someone want to invest as a Tenant-in-Common in a property? There are several reasons someone may consider doing so. First, it is possible that the TIC investor may be able to realize higher cash-on-cash returns than a single-owner of a smaller property. An example may better illustrate this.

Let’s say that you, as an investor, currently own a rental duplex in a highly-appreciated area. Let’s also say that the current market value of this rental property is $1 million, and it is currently being rented out for $2000 per month. Assuming expenses on the property of $500 per month from property taxes, insurance, maintenance, and some utilities, then you would be receiving $1500 per month in net operating income (NOI), or $18,000 per year. If you own the property free-and-clear, you would be earning a current return on your equity of only 1.8% per year.

By contrast, many larger commercial buildings (office, retail, industrial) as well as some larger multi-family complexes, located in other parts of the country, and packaged as TICs, often have current cash-on-cash returns that are significantly higher. As an example, if one could find a TIC investment with a current cash-on-cash return of 7%, then that same investor with $1 million would be earning $70,000 on their equity, net to the investor after all expenses and debt servicing. And, of course, since as a TIC owner you are the owner of real property, you would still retain the advantages of traditional investment real estate, such as depreciation deductions, interest deductions, and any capital appreciation that may occur to the property over the years.

In addition to potentially higher cash-on-cash returns, TICs offer many investors an easier way to diversify their real estate holdings, as many TIC minimums are in the $250,000 to $500,000 range. This means that the above investor with the $1 million in equity in one property, in one location, could conceivably diversify their holdings into, say, three TIC properties with roughly $330,000 each, in three different geographic locations, therefore mitigating the risks of single-property ownership in one geographic location.

Additionally, since many TIC properties are investments in Class A or Class B buildings, leased to stable “credit” tenants, and often well-located in central business districts or just outside larger metropolitan areas with positive demographics, an investor may also realize a higher-quality investment through an improved tenant profile and/or business location.

Perhaps the primary reason why many investors have considered TIC investments is that they are typically structured as a “turn-key” investment, where all the due-diligence, property management, financing, and asset management functions are put together for investors, freeing them to simply be a “passive” investor without the worries of day-to-day management or operational concerns. TICs are put together for investors by professional real estate companies, known as “sponsors”, who normally stay involved with the properties as property managers and/or asset managers.

Last, because TIC investments are “pre-packaged” for investors, performing a 1031 Exchange into a TIC may be easier than an Exchange into a single-owner property, where the IRS’s restrictive rules may place an undue burden on investors as they seek to identify and close on properties within the necessary time-frames.

For all these reasons and more TICs have become a popular choice for rental property owners looking for potentially higher income, greater stability and lower management burdens.