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How Does Tenancy in Common Work in Real Estate?

There are plenty of ways to become a homeowner. However, with today’s prices and the competitive nature of the market, it’s become increasingly more challenging to own real estate. As such, buyers today need to find more affordable ways to acquire real estate. Luckily, there’s a solution that could make homeownership more attainable for some. Tenancy in common agreements can help buyers acquire real estate that may have otherwise been unaffordable. To learn more about tenancy in common and how it works, just keep reading.

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Contents of This Article:

What is Tenancy in Common?

There are several ways to achieve real estate ownership, whether you buy it on your own or with others. One unique way to own real estate is with a tenancy in common (TIC) agreement. Investors, homebuyers, and property managers in Northern Virginia can benefit from learning about this unique ownership method. That said, tenancy in common is a legal agreement in which two or more parties share ownership rights to a real estate property or parcel of land.

Each independent owner controls an equal or a percentage of the entire property, whether commercial or residential. In turn, the owners are referred to as tenants in common. You can legally establish tenancy in common with a deed, will, or written agreement by all individuals. Once finalized, each party is responsible for their part of the mortgage, taxes, and other bills.

Example of Tenants in Common

Suppose you want to buy a home that costs $300,000, but you can’t afford it on your own–you can only afford about 25% of the monthly mortgage. Instead of passing up the opportunity to purchase the home, you can enlist the help of subsequent buyers to cover the rest of the mortgage obligations. If you find more buyers to help buy the property, you will enter a tenancy in common agreement

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So, suppose you’re tenants in common with two additional buyers–one that pays another 25% of the mortgage and one that covers the remaining 50%. In that case, the owner with 50% retains half of the equitable interest in the property, while you and the other buyer own 25% each. After all, equitable interest is determined by how much each owner pays for the property. Additionally, equitable interest determines how much each owner pays in taxes. If the property is sold, proceeds are distributed based on individual ownership percentages. 

It’s important to note that there are three general ways to share real estate ownership–tenancy in common, joint tenancy, and tenancy by entirety. Before we discuss some of the differences between these options, let’s discuss how tenancy in common works. 

How Does Tenancy in Common Work?

You can create a Tenancy in Common agreement for residential or commercial properties anytime. Additionally, owners can join as an interest after other members have entered a contract. That said, owners that are tenants in common share privileges in all areas of the property. 

When multiple parties agree to share ownership of a property, each area of the home is split between the group. As such, no one owner can claim certain parts of the property, regardless of their equitable or investment interests.

Additionally, property costs are split evenly between all tenants in common. Each owner pays funds into a group bank account, which pays everything from mortgages and property taxes to utilities and maintenance. That said, the amount you owe depends on your equitable interest in the property. Then, the shared account is used to distribute payments necessary to maintain property ownership. 

If you’re unfamiliar with tenancy in common, it’s easy to confuse it with joint tenants. So next, we’ll go over the similarities and differences between the two agreements. 

Joint Tenants vs. Tenancy in Common

If you’re just looking at the names, joint tenants and tenancy in common appear to be similar terms. However, there are several ways for two or more parties to own real estate–these are just two different types. Both strategies allow more than one person to take ownership of a single property. However, there are a few key differences between the two agreement types. 

In a joint tenancy agreement, each owner receives the same equitable interest as all other owners. For instance, if there’s a joint tenancy with two owners, each must control 50% of the property. If there are four owners in a joint tenancy, they all control 25% of the property. On the other hand, tenants in common may own different equitable interests in the property without ensuring it’s shared evenly among each owner.

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Since joint tenancy requires each owner to have the same equitable interest, each owner must take the property title at the same time the deed is acquired. However, in a tenants-in-common agreement, owners can do so whenever they choose. After all, there’s no need to be present at the acquisition of a deed since equitable interest is interchangeable. 

When it comes to flexibility, a tenants-in-common agreement is much more open-ended compared to a joint tenancy. For instance, removing one owner from a tenant in common agreement doesn’t affect the agreement. However, if one person wants to leave a joint tenancy agreement, the owners must sell the property and split the proceeds evenly. 

Before joining a tenancy in common agreement, it’s helpful to know the pros and cons. So read along as we review some of this property ownership method’s benefits and disadvantages. 

Benefits and Disadvantages of Tenancy in Common

Property ownership is a dream for most people, especially as it’s becoming increasingly more difficult. However, if you’re thinking about owning a property with other people through a tenancy in common agreement, check out some of these benefits and disadvantages beforehand. 

Pros of Tenancy in Commonpros-and-cons-of-tenancy-in-common

  • It Makes Property Ownership More Attainable- A tenancy in common agreement is suitable for those that want to attain ownership but cannot do so alone. 
  • You Share Liabilities and Taxes with Others- When you share ownership of a property, you also share the liabilities and expenses. So, you don’t have to worry about paying for every property expense alone. 
  • Each Tenant Benefits from Property Appreciation- Just as you split costs and expenses, each tenant benefits from property appreciation. If you own a larger percentage of the property, you get even more appreciation benefits.
  • Agreements Can Be Created or Amended Whenever- Tenancy in common isn’t as strict as other co-ownership agreements. As such, you can create or amend your agreement at any time.

Cons of Tenancy in Common

  • Each Owner is Responsible for Costs, Debts, and Taxes- While each owner gets to split the benefits, they also must split the costs for taxes and other expenses. However, your expenses depend on how much equitable interest in the property you have. 
  • Agreements Offer Less Protection than LLCs or LLPs- While LLCs and LLPs protect against personal liability, tenancy in common agreements offers less liability protection. 
  • Owners Don’t Need the Consent of Other Owners to Sell the Property- If one owner wants to sell the property, they can force the sale of a property. 

Turn Your Shared Property Into a Rental

You may consider a tenancy in common agreement if you want to own real estate but don’t know how to afford it. Depending on your and your co-owners goals, you can turn your shared property into an income-producing rental home. If you all agree on a solution, you can split the income between all parties. However, each party must agree on everything regarding management, maintenance, leasing, or selling the property. 

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So, if you’re looking for a top-notch management company that everyone can agree on, look no further than Bay Property Management Group. Our team of professional property managers will ensure your rentals are taken care of 24/7. To learn more about our comprehensive rental management services, contact BMG today.