What Are the Risks of Tenant in Common 1031 Exchanges?
Robert G. Hetsler, Jr. J.D. CPA
Inspirational Leader, Spiritual Warrior, Life & Business Strategist, Author, Entrepreneur Talks about #Overcoming Adversity, #Leadership through Inspiration, #Belief System, #Success #Importance of Progress
If you are new to the world of real estate investing, it is important to understand any potential risks or downsides that you might be facing in a tenant in common structure. It is a valuable exercise to review all of the offering materials related to any TIC investment so that you are fully clear about any risk disclosures or specific details for the listed property you are considering.
Anytime you are exercising an interest in real estate property, you are confronting the possibility of risks. Real estate interest could be speculative, so you need to be prepared to handle some or all of the losses associated with the potential downside. One such example are any TIC interests subject to recourse liability. What this means is that the investor could be responsible for fronting cash that the property may require in the future.
Bear in mind that TIC investment is not a liquid one. This means that there are some restrictions on transferring your interest. This where it becomes valuable consult your accountant and your legal professional. There are risks associated with specific property in the general real estate market any time that you make an investment. Since TIC investments are frequently leveraged, there is an inherent increased risk for volatility or loss of investment. This is largely due to the fact that the manager retains supervision and broad authority over the financing terms. The fees that are paid out to the manager or any affiliate in a TIC investment can be high and could be used to offset profits otherwise associated with the operation and ownership of the real estate property.
Another potential risk of a TIC investment is that there is no guarantee that your cash distributions will continue during the time you own it. There is also no promise that the value of the property will continue to grow or that the property will ultimately be sold in the time period you had hoped for it to be sold in. A short way of saying this is that TIC investments fall under the general guideline that past performance does not guarantee future results. Keeping this in mind can help you make a more informed decision about opting to get involved with a TIC investment to begin with.
Like all investments, you face some level of result by opting to use a tenant in common exchange. Make sure you’re clear of the potential downside before moving forward.
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9 年Thank you Robert for your thoughts. I absolutely agree that an investor has to assess all aspects of a particular product and make an informed decision based on their particular interests, goals, and diversification strategies. You point out very important elements of that due diligence and required assessment. A properly structured TIC investment can be a perfect option for a 1031 Exchange if chosen wisely. In the market downtown of 2008, TICs suffered considerably being highly leveraged and with tenants that lacked staying power. It was a very tough time for that market, most markets. Things to consider in a fundamentally sound TIC investment include the absence of debt/leverage in the property, NNN or Absolute Net long-term leases to high-quality, corporate guarantee tenants, newer construction in growing, vibrant areas, track record and strength of national tenant, right-sized single-tenant buildings for future re-lease if necessary, track record of sponsor/owner/seller, contracted lease rates with indexed yearly adjustments, recession resistant industry of tenants (i.e. medical),etc. When structured right, these properties can be stable, reliable, and passive income producing properties for the no-frills, conservative investor who wants a solid return in high quality institutional grade property. I welcome investors to assess the TIC properties offered by Rockwell IRA Properties (www.rockwellira.com). We specialize in just such properties, for 1031 exchange and self-directed IRA investors.
Inspirational Leader, Spiritual Warrior, Life & Business Strategist, Author, Entrepreneur Talks about #Overcoming Adversity, #Leadership through Inspiration, #Belief System, #Success #Importance of Progress
9 年Dr.Doblin, this is the second time you have posted something on one of my 1031 exchange related articles and the last time you did I offered to find out more about your situation and see if there was a way that I might be able to assist you. However, I want to make it clear that we have never met,never conducted business of any sort together and I certainly have never been involved with you or any of your business in any type of personal or professional capacity. I want to make this clear to all readers because your continued negative posts on my articles could easily be perceived that I, somehow, am the reason that you have a poor taste in your mouth regarding 1031 exchanges. Again, I am happy to speak to you to see if I can offer assistance in your situation but please stop posting negative type comments on my posts unless you also make it clear that we have never done business together and your posts in no way relate to any experiences we have had together.
Doctor / Founder at NJ Cosmetic Center and At Home Sleep Solutions
9 年if u can't do it on your own DONT