Investing in property can be a powerful tool for building wealth and generating positive cash flow, with one investment structure – Tenants in Common – worth exploring. Understanding how Tenants in Common works can open up new avenues for property investment and portfolio diversification.
Read on to learn about tenants in common and how it works so you can understand exactly what it means as a property investment option.
What Are Tenants in Common?
How It Works For Investors
Tenants in common can occur anytime. In this setup owners (tenants in common) have interests and privileges within all the areas of the property but every tenant is allowed to have a different proportional share or percentage of the financial share of the property.
For property investors, understanding different ownership structures is crucial. One such structure is tenancy in common, which can significantly impact your investment.
The Absence of Right of Survivorship
A key distinction of tenancy in common is the absence of “right of survivorship.” This means that if one tenant in common passes away, their share of the property doesn’t automatically transfer to the surviving co-owners. Instead, it becomes part of their estate and is distributed according to their will or intestacy laws.
While a tenant can name their co-owners as beneficiaries in their will, it’s not guaranteed. This is a critical consideration for investors, as it can affect future ownership and potentially complicate the sale or management of the property.
From an investor’s perspective, owning a property with tenants in common presents unique challenges. While each tenant is responsible for their portion of property taxes and mortgage payments, the reality is often more complex. One tenant might take the lead on payments and repairs, requiring reimbursement from the others. This can lead to administrative burdens and potential disputes.
As an investor, you need to be prepared for this shared responsibility and have clear agreements in place with your co-owners regarding financial contributions and property management. Understanding the legal implications of tenancy in common, including the potential for fractional ownership changes through inheritance, is essential for protecting your investment.
Joint Tenancy and Tenants in Common
How It Works For Investors
Imagine you have a cake that is cut into equal slices. What you have there basically lays down what is joint tenancy. In this arrangement every joint tenant owns an equal share of the property simultaneously and has the same rights and responsibilities.
Its difference from the tenants in common arrangement is that if one joint tenant passes away, their share automatically transfers to the surviving joint tenant(s). Another is that should one joint tenant want to sell their share, the entire property usually needs to be sold, and the proceeds are divided equally among the co-owners.
For investors this kind of setup simplifies ownership especially for partners and married couples. In addition the right of survivorship is a double-edged sword as it limits control over the ultimate disposition of the property and streamline succession planning.
If you are an investor you may also want to take note that if you want to exit the arrangement you may have to sell the whole property.
Joint Tenancy Vs. Tenancy In Common: Their Similarities and Differences
The tenancy in common arrangement offers flexibility. As an investor in this setup, you can give your share to whoever you choose and you can allow strategic asset distribution.
For joint tenancy, estate planning is more simplified as the surviving joint tenant gets the share of the deceased but you will gain less control over how the asset is distributed and may stray from your long-term investment goals.
Tenancy in common arrangement poses a risk for investors due to the impact of a co-owner’s debt. One tenant’s creditor can pursue that tenant’s share of the property to satisfy the debt. As a result, there is potential to force property sale which can impact other co-owners who are not involved with the debt.
A deed of trust governs both types of arrangement. This document clarifies the ownership percentages, responsibilities for expenses, and procedures for decision-making, which is essential for investors.
As an investor you need to be discerning about the implications of each co-ownership structure before entering into an agreement. Understanding how these arrangements work can impact estate planning, liability, and creditor claims and so knowing these can help you make more informed decisions. Consulting with a legal professional specializing in property law is highly recommended.
You can also check out our blog about property investment taxes if you are interested in delving deeper into the world of property!
Explore Investment Opportunities With Us
The team at Positive Income Properties are experts at helping investors build a successful property portfolio providing low-risk, high-return rental investment properties across Australia. If you are considering an investment property with a Tenants in Common arrangement, please chat to us to let us guide you through your options.
Book us to chat with us and see what we can do for you!
Gil Elliott is the Managing Director and Founder of Positive Income Properties. Gil has a rich background in business consulting and property investment. All of these he gained in his nearly four decades of experience in the real estate and marketing industries.
