The advantages of choosing a tenants in common 1031 exchange
In truth, there are many reasons why a real estate investor might choose to do a TIC investment for a 1031 exchange. They are as follows:
Low minimum investments and flexible investment amounts
Since multiple people are investing in the same asset, the minimum investment on a TIC property is usually lower than one might expect. Additionally, since a tenants in common ownership arrangement allows each person to maintain a different fractional interest in the property, the amount you can expect to invest may be flexible, depending on the size of your ownership stake.
Opens up the potential for diversification and safety
Given that the barrier to investment is lower with a TIC property, that offers many investors the chance to diversify their portfolios and invest in multiple properties. This, in turn, makes each investment a little safer because it reduces the effect that experiencing a loss will have on your wallet.
In addition, during tough financial times, multiple people are likely to have a greater pool of resources to draw upon than a single person. With that in mind, there is also less of a risk that you'll no longer be able to afford the investment property.
Access to higher-quality real estate
Again, since many people are pooling their money, the TIC investor often has access to higher-quality real estate than they would be able to afford on their own. This also opens up the opportunity to attract tenants with higher levels of income.
Ease of ownership
Finally, the fact that the property has multiple owners means that there are multiple sets of hands to take care of the day-to-day operations of managing an investment property. While you will have to pull your weight, the amount of work you'll be expected to do will be much less than if you owned the property all on your own.
The disadvantages of choosing a tenants in common 1031 exchange
That said, like any trade-off, there are a few disadvantages to doing a tenants in common 1031 exchange as well. We've listed them below for your consideration.
Shared risk means a shared reward
Sharing a portion of the risk for the investment means you're also required to share any rewards from it as well. The portion of any rent or sale proceeds that you receive from a TIC property will undoubtedly be smaller than what you would get if you were the sole investor. After all, you'll have to share it with the rest of your co-owners.
You have to vote on most major decisions
Having co-owners also takes away your right to make most unilateral decisions about the property. For the most part, IRS Revenue Ruling 2002-22 requires that a vote take place before moving forward with any major decisions. If you're not the type of person who does well with group decision-making, this may not be the best type of investment for you to enter into.
The bottom line
Like any investment, doing a tenants in common 1031 exchange has its potential risks and rewards. Ultimately, it's up to you to weigh those against each other before deciding whether this kind of 1031 exchange is right for you.
However, before you make your final decision, we strongly recommend that you read up on all the IRS requirements for these exchanges so you'll have a good idea of what will be expected of you when you enter into this type of partnership.