December 16th, 2010 8:12 PM by Lehel S.
SO you want to buy an investment property but can't make sense of the different ways to hold title.
This simple issue can be grounds for a good headache for a seasoned investor, much less someone entering the world of real estate investing.
I have been asked lately what is the best way to hold title on your investment. It all depends on a few things that I will shed some light on. But, whatever the reason behind the way you choose to take title to your investment, rest assured it is extremely important you know the fundamental differences.
What is the difference between joint tenancy and tenants in common (TIC) and what the heck is an LLC? For joint tenancy and TIC there are many similarities. Two or more people who own a home as joint tenants with survivorship or as TIC are each considered the owner of an undivided interest in the whole property.
That is, if there are two owners, each is presumed to own half, unless specified otherwise in the deed. In the event there is a court judgment against one owner, the creditor may wind up owning that person's interest in the house while the other owner's interest remains unchanged.
In some states, an owner may sell his or her interest to someone else, whether the other owner approves or not. Such a sale ends a joint tenancy, so the new owner becomes a tenant in common with the remaining original owner(s). This arrangement becomes complex if, say, A, B, and C own a house as joint tenants and A sells her interest to D. In that case, B and C are still joint tenants with respect to two-thirds of the property, but tenants in common with respect to D's third.
The major difference between joint tenants and tenants in common is the right of survivorship. If one joint tenant dies, the property automatically belongs to the other owner or owners, avoiding probate. If three people own it and one dies, the two surviving owners each become owners of an undivided one-half interest.
But if the owners are tenants in common, the other owners have no rights of survivorship - they would receive the deceased's interest in the property ONLY if it was specified in his or her will or by inheritance.
Clear as mud right? Now, what about a limited liability corporation or LLC? The chief function of an LLC is to protect the investor from any judgments against them personally, as it places an additional layer of protection between you and the liability arising from your ownership of the property. The downside to this setup is that the fees associated with an LLC in California are a minimum of $800 per year to keep the corporation in good standing.
If you are a first-time investor it would be more feasible to avoid the LLC and maintain a joint tenancy or TIC.
The savings would allow you to add an insurance umbrella on the investment to protect your personal assets outside of the investment.
In real estate it is always a good time to buy if the investment meets your criteria and your tolerance for risk. Being properly guided through the initial investment is of utmost importance, as you want to avoid the mistakes commonly made by first-time investors.
As with all real estate, it can be handed down to children through generations as a thing of greatest wealth. It is a tangible asset and it can provide cash flow in retirement. If you make the choice to invest, choose your agent like you would choose your doctor.