Three Situations When You Should Buy Property as Tenants in Common
Have you been thinking of buying a vacation property, but can't afford to do it unless you co-purchase it with a friend or two? Or maybe you've been considering investing in a rental revenue property as a joint venture with family members. Maybe you and your partners have decided to buy a building to house your business operations. These are three situations in which you would take title as tenants in common, instead of joint tenants.
In the lingo of real estate law, the word "tenant" does not mean someone who rents premises from a landlord - it means someone who holds title to real property. The two most common methods of property co-ownership are joint tenancy and tenancy in common. These two forms of co-ownership differ greatly, particularly with respect to disposition of the property.
Joint Tenancy: A joint tenancy is created when two or more persons acquire title to the property in equal interests. All of the joint tenants jointly own all of the property, and the property cannot be mortgaged or sold unless all of the joint tenants agree to do so. If a joint tenant dies, title to the property is automatically conveyed to the surviving joint tenant(s). The property cannot be included in the person's will because the surviving joint tenant(s) have rights of survivorship. Joint tenancy is the usual method of co-ownership for married and common-law couples. It ensures that if one spouse dies, title will automatically be re-issued solely in the name of the surviving spouse without the need to put the property through probate.
Tenancy in Common: Tenancy in common is an alternative that works well for two or more purchasers to buy fractional interests in a property. Those interests can be equal or unequal, and each co-owner can deal with his or her share of the property without the consent of the other owners, including passing the share onto his/her beneficiaries under a Will. This form of vesting title is the ideal choice in the three situations we talked about earlier.
Scenario #1: Co-ownership of a Vacation Property
You've finally decided to buy that vacation home your family wants, but you can't do it alone. So you ask some friends to buy in with you and you will all be able to use the property for your holiday getaways. Purchasing the property as tenants in common gives you more flexibility, because not all of the co-owners have to purchase equal shares of the property.
Let's say you're able to come up with 70% of the purchase price - that would mean you only need to have your friends pay for 30% and they would then own a 30% interest. Remember that this also means you'll be paying 70% of the costs and expenses of the property, such as property taxes, repairs and improvements, etc. But it also means you get to use it 70% of the time and if you rent it out you would be entitled to 70% of the rental income. It's a good idea to sign a co-ownership agreement to clearly set out what every party's rights and responsibilities are. It's also important to establish a usage schedule, to ensure that everybody knows who will be using it at any given time and when it will be rented to others (if applicable).
Scenario #2: Jointly Owned Revenue Property
It's not uncommon for family members or colleagues to co-invest in a rental property as a joint venture, and this is another perfect scenario for co-ownership as tenants in common. Co-owners can invest as much as they can afford, and they then have the right to a pro rata share of the rental income. They must also pay their pro rata share of the expenses and take a pro rata share of any losses. Be sure to draw up a rental joint venture agreement to be signed by all of the co-owners. This could help you avoid major disputes down the road if things go sideways.
Scenario #3: Business Partners Co-Purchasing Commercial Property
If you and your partners have the means to buy your own building in which to operate your business, the property will be a valuable partnership asset. Partners should purchase ownership interests in the same proportion as their partnership interest - for instance, if there are 3 partners who each have an equal partnership interest, they should each put in 1/3 of the purchase price. And their contribution to the expenses (property taxes, mortgages, assessments, repairs and upkeep, etc) should be made on the same basis. Co-owners who do not pay up can be forced to do so by operation of law.