Co-ownership of Your Properties, Is It Right For You?
Several factors will affect how well a business alliance works out. If you’re on the fence about it, keep reading.
Buying property is one of the most expensive purchases you’ll make, and growing a real estate business takes time, patience, and capital. In many cases, the latter being the most prohibitive. One way to speed up growth is to increase your buying power by purchasing your properties with co-owners. Finding the right partner for co-ownership certainly has its benefits; ideally, two or more individuals working well together can produce more than the sum of the parts.
On the flip side, when you introduce money into any kind of a relationship, things change. So, when things go wrong, they can be downright nasty. A close friend or family member that you thought you knew can react unexpectedly when faced with the profits or losses of your venture. Several factors will affect how well a business alliance works out. If you’re on the fence about it, keep reading.
How To Make Co-ownership Work
Business relationships, not unlike other personal relationships, take a lot of work. Depending on the scope of your business, you may spend more time with your partner(s), than your significant other. That’s why it’s crucial to find someone who you are compatible with and who has similar business goals, including exit strategies.
As someone always has to be #1, decide how the legal ownership will look like. Setting up a 50/50 partnership can lead to problems when important, and often expensive, decisions need to be made. So, explore some type of partnership agreement that lays out what will happen if one partner can’t meet their share of obligations, wants out, dies, etc.
There are a few common options for co-owning property; most importantly, they detail the legal rights that each partner has to the property.
Tenants In Common
Purchasing as Tenants in Common (TIC), each investor will own the property proportionately based on their investment. As such, profits will be divided based on the percentage of ownership, while each owner will also be responsible for their share’s worth of expenses or expenditures. In the event that a partner passes away, their share would automatically go to their heir. TIC investors are free to sell off their portion at any time, as well. To avoid having a strange business partner forced onto you, consider including a “right of first refusal” clause in the contract. This will give you first dibs on their share.
Joint Tenants (with Right of Survivorship)
This type of ownership is legally very similar to TIC; the big difference with Joint Tenant with Right of Survivorship (JTWROS) is that in the event of a partner’s death, the shares are transferred to the other co-owners.
Limited Liability Company
Commonly known as an LLC, a limited liability company is its own business entity; thus, properties would be not be owned personally, but in the name of the LLC. One advantage of using an LLC is, as the name suggests, limited liability. Similar to a corporation, the member’s personal assets should not be exposed to pay-off any business debt.
There are also other advantages and disadvantages to co-ownership:
Pros of Co-ownership
- Provides the opportunity to buy larger properties that would typically be out of reach
- Less capital investment and lower total exposure to risk
- Expenses and expenditures are shared among the partners
- Mitigates losses during bouts with vacancy
- Division of time and responsibility
Cons of Co-ownership
- If relying on lenders, rates are often based on the lowest credit score
- If a partner is short on cash, the other owner(s) has to make up the difference
- Depending on your agreement, you may need to ask for permission before authorizing specific tasks
- Since someone has a majority stake, final decisions won’t always go your way
- When business is booming, you’ll have to split the profits
In a perfect world, you would have all the time, money, and freedom to make decisions as the sole owner of your business. In reality, it is more difficult to build and grow a successful real estate business without sufficient funding.
Though there are complexities, there are certainly benefits to co-owning properties, but always have the proper legal documents to protect yourself against any disputes that are bound to arise.