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by Phoebe Chongchua
Imagine if all you had was a little less than two months -- 45 days to be exact -- to find a property to buy. It could create an exorbitant amount of stress.
If you’re a real estate investor who chooses to defer paying capital gains taxes on the sale of your investment property and roll those gains into the next investment, then you’re probably very familiar with the mad rush to identify a replacement property to purchase. Current tax laws require that those who choose to use the 1031 exchange vehicle have to select a replacement asset within 45 days and then close on it within 180 days.
That's part of what is making the concept of owning a small part of a larger asset a growing trend. The tenant-in-common (TIC) program offers fractional ownership of commercial real estate, allowing as many as 35 owners per deal to own a portion of properties, such as apartments or factories. This opens the door to commercial real estate for investors who might not otherwise be able to afford the property.
"A lot of investors who are doing a 1031 exchange love the TICs because they are pre-packaged. Essentially an investor could study the available property and could be invested within a matter of weeks," says Kathy Heshelow author of Effortless Cash Flow: The ABC's of TICs (iUniverse, 2006).
Heshelow adds that it is a big time-saver and a concept that is growing in popularity. In 2002, the Internal Revenue Service clarified the status of TICs as real estate and not partnerships; that ruling also made TICs qualify for Section 1031 exchanges. Today, billions of dollars are being poured into these types of investments. And while most TICs are sold as securities by licensed securities brokers, some are sold through private real estate companies as real estate transactions. There is even a Multiple Listing Service for TIC properties. It advertises that tcimls.com is the only national MLS for the TIC industry.
There are several factors that lure investors to a TIC property such as: seeking a higher quality property, no longer wanting to manage the property, wanting to establish monthly cash flow, wanting to diversify a financial portfolio and invest in real estate outside of a geographical area. It's often referred to as a passive investment because you no longer have to have your sweat-equity involved as with owning and actively managing something such as a duplex. TICs take the management work out of the equation and typically provide an average annual return on an investment of about 6-8 percent.
"It's passive; there's no management -- there's no day-to-day involvement," says Heshelow.
Still another benefit that attracts savvy investors is the concept of using IRA or 401k money to buy a TIC property. Heshelow says it works sometimes. "Many of the TIC properties have an LLC component which is an all-cash component and that is able to take IRA or 401k monies, but not every offering has that possibility."
But Heshelow cautions TICs are not for everyone. First of all you have to have a net worth of about one million dollars to buy most TICs. Secondly once you're in a TIC, it's not always easy to get out. The secondary market for reselling TICs is not well established. Many think that it is coming as the TIC industry, now in its infancy, eventually grows up. Heshelow adds a few more reasons to avoid them, such as if you are only interested in a short-term investment. Most TICs are held for about five to seven years. Heshelow says you should never invest in a TIC if you are putting all your money into it and then depending on the monthly cash flow. TICs, like all real estate, are not liquid -- getting your money out can take lots of time. She also adds that you should not consider investing in a TIC unless you have at least $100,000 in equity to invest.
The TIC program can be an excellent option for the right investor. It can also be a solution for the investor doing a 1031 Exchange and looking to find the right property before time runs out. But, as with all real estate investments, there is no substitute for education and research before you close the deal.
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