How I Structure My Partnerships (Tenants in Common) Agreemenet

[Jonathan Small]

I have been investing since 2005.  I have been sharing my journey with many of my friends, family, and coworkers.  Often people would ask about how to partner on a deal.  I originally was not a fan of partnerships because it was hard for me to trust people. I also didn't want good relationships to end over money.

If you are open to considering partners you gain resources and talents such and down payment money, property management, deal analysis, deal finding, CPAs, attorneys, brokers and much more.

My thinking changed when a lender told me to consider them as my partner.  They are 80% owner and I am 20% owner.  I am putting up 20% of the funds and they are putting up 80% of the funds.  I manage the deal.  They only want interest payments.  I would get all of the upside.  Every house I was buying, I was partnering with the bank.

Once I realized I have been partnering all along I decided to looking into how to structure partnerships with friends, family, or other investors. I meet with a real estate attorney. Below is their explanation of Tenancy in Common (TIC) agreements. This is how I have structured my last 10 deals. This is also how I plan on doing future deals.

Pros:

-  Makes it possible to buy property when other arrangements won’t work

-  The number of people involved can change over time

-  Different people involved can own different amounts of the property

- The agreement is recorded with the deed. This protects all parties. I also like that each party can sell off their portion without impacting the other parties. When you buy or sale, everyone on the TIC signs the contracts with the attorney.

Cons:
-  All tenants are equally liable for debts and property tax
-  It only takes one of the people involved to force the sale of the property
-  You don't automatically get the property rights of a fellow tenant when they die

When my partners and I own property as tenants in common, all areas of the property are owned equally by the group, even if tenants have a different share of the ownership.

For example.  3 partners are buying a 100k property.  The bank is financing 80% or 80k.  Partner A can own 25% of the property by supplying 50% of the down payment (10k).  Partner B can own 25% of the property by supplying the other 50% of the down payment (10k).  Partner C can own 50% of the property by agreeing to operate the property and provide (5k) towards operating reserves.  This is similar to how I structure my deal.  Keep in mind you can get creative as you want.  It is up to you and the partners to determine equity split and cash infusion.  There is not an industry standard.  Trust me, I researched this topic for months.  The equity split of the 1st deal does not have to be the same as the 12th deal.  It is totally up to the partners.  However, I encourage you to keep it simple.

You probably think this is expensive and complicated to set up. This is not true. It cost me $2,000 to consult with a real estate attorney and get all the proper paperwork. I spent another 200-400 consulting with my CPA. Once I got the documents I can modify the documents as needed. I don't pay these fees any more because I have the documents and the knowledge. There is usually a fee of less than $100 to record the TIC agreement. Depending on the bank, they may want anyone that has more than 20% equity on the loan. Each bank is different. I have found the banks I work with don't mind TIC agreements. If you think about it they are getting more people to secure the loan and reducing their risk.

Your are probably thinking that it is difficult to explain all of this to people you want to partner with.  This is not true.  When I do these type of agreements I get the partners to pay my attorney $200-300 for an hour call.  This allows my partners to ask the attorney any questions and verify the information I am giving them.  It also creates creditability and trust between all of us.  I also have them spend $200-300 to talk with my CPA.  Usually by the end of these two calls they understand the expertise I bring to the deal and the reason I get 50% or more of the deal.  I personally like these calls because my partners usually pay for them, I get to talk to high level real estate professionals, and it shows me that they are serious partners that I want to be involved with.  By the end of these calls my partners are more informed and empowered to move forward.

Caution:  I encourage you to put in writing how you and the partners will handle adversity.  This should not stop you from partnering with others.  Rather this should decrease miscommunication and  align expectations.  For example:  what happens if property needs a new roof, what if property remains vacant for 2-3 months, how long do you plan on holding the property, at what price are you willing to sale....

Partner with others.  You are more likely to be successful when you combine your resources and talents.

Jonathan Small

Please PM me if I can be of any assistance on Tenant In Common agreements.  Thank you