What is a TIC?
"A TIC investment, I've never heard of that."
This was a very common statement in 2001, and still is in many parts of the country. Is this just a fringe real estate investment? Well not anymore! Total raised in 2001 was a paltry $166 million. Then a few years with growth of about 80% annually finds us with a 2007 forecast of $4.5 billion for the industry *.
What could possibly cause that kind of growth?
Utilizing a TIC a small-accredited investor with just $100,000 of equity could have a commercial tenant worth millions of dollars on a long-term lease. A long term lease on a property that after considerable due diligence appears to be firmly in the path of growth. In addition to the quality of the property and the tenant driving the growth is the investor wanting to trade the Terrible "T's" - Tenants, Trash and Toilets for the Terrific "T's" - Tee Times and Tennis. The TIC investor gives up day-to-day management in exchange for professional management.
Most of today's large-scale real estate transactions (over $5 million) involve institutional investors, among these are the Real Estate Investment Trusts (REITs), the larger life insurance companies and pension funds. Institutional Investors have a set of parameters that must be met and exercise considerable due diligence when identifying investment property. Institutional-quality real estate is real estate that meets the stringent requirements of an institutional investor. The simple fact is that many investors appreciate that there is now a way for smaller real estate investors to complete a section 1031 exchange or outright purchase and move up into institutional-quality real estate.
Why are TIC properties becoming the replacement property of choice for 1031 exchanges?
Tenancy-in-Common (TIC) is simply a form of holding title to real property as a co-owner and share in any net income, tax shelters, and potential growth. TIC interests are direct investments in real estate, and they are subject to all of the risks of owning, operating and disposing of real estate.
One of the challenges of doing a 1031 exchange is locating a suitable, like kind property in a timely manner. Finding a property that has the proper equity amount, the right debt structure and cash flow can be challenging. In addition, one of the objectives of many 1031-exchange candidates is to find a replacement property that eliminates their management burden. This is not a "fix and flip "strategy, TIC properties would not be suitable for short term investors and are considered illiquid. As always you should consult your tax professional for details regarding your specific situation.
Because securitized TIC properties have flexible equity positions and financing is already in place they can usually be tailored to fit a specific situation and closing can be accomplished in a timely manner. Sponsors of securitized TIC's have a vested interest in the performance of the property and provide the professional management. Investors can comfortably diversify outside of their local area knowing the sponsor has a stake in the property performance.
A Real Life Scenario**
You bought a rental for $199,000 a few years ago and it is now worth $388,000. There is a loan of $179,000 at 6.5%, principal and interest is $1,137 plus $298.00 taxes and insurance. Another $30 for homeowners' fees makes the total monthly payment $1,465.
The house is rented for $1,700 providing an annual net cash flow of $2,820 on your equity of $209,000. That is a 1.35% return on your equity, before vacancies, trash clean up, toilet repairs, paint, drywall repair etc!
Let us suppose you 1031 Exchange to a property with the same value. Property with a lease that currently might pay you 6.5%+/- on your equity. Now the annual net cash flow is $13,650 with no responsibility for the Terrible "T's"!
Fast-forward 5 years...
The new property cash flow totaled $68,250, which is $54,150 more than the rental house if the house was rented 100% of the time. If the rate of appreciation was the same on both properties the cash proceeds to you upon re sale would also be equal. The only difference; $54,150 more in cash flow, no tenants to deal with, no trash to pick up and no toilets to repair!
**This illustration is hypothetical and is not intended to represent the performance of any specific product's past or future results. Past performance is not indicative of future returns
Rick Willoughby AAMS
This material is for educational purposes, it does not constitute an offer for purchase or sale of real estate securities. Such offers are solely made through the sponsor's Private Placement Memorandum, which is only available to accredited investors.
Rick Willoughby is a Registered Principal offering securities and advisory services through Independent Financial Group, LLC, a registered broker-dealer and investment advisor. Member FINRA and SIPC. Independent Financial Group, LLC and Symphony Financial Services, LLC are not affiliated.
