For people who identify an attractive property that costs more money than they have in their IRA or more than they can (or are comfortable) borrowing, tenancy-in-common may be a solution.
Tenancy-in-common is a form of concurrent ownership in which two or more persons each have an undivided interest in the entire property, but no right of survivorship. Because each person’s interest, or share, is undivided, each can sell his share at any time without the consent or agreement of the others. So, how does this help you? Let’s go through an example:
Let’s say you and two of your friends find a good property in which to invest, and the purchase price is $100,000. With a tenancy-in-common arrangement, you can buy the property together, with each person putting in the amount of money he or she has available. Each will own a certain percentage of the property, the income generated from its operation, and, eventually, a percentage of the profits when the property is sold.
Owners Contribution Amount % Ownership
You $60,000 60%
Tom $20,000 20%
Rob $20,000 20%
Total $100,000 100%
A tenancy-in-common arrangement also allows use of both IRA funds and non-IRA discretionary funds to buy a single investment. It is not a requirement that each of the owners use the same type of funds as the others.
Here is what I mean:
Owners Contribution Amount Contribution Type
You $60,000 50% IRA money/50% cash
Tom $20,000 100% IRA money
Rob $20,000 100% cash
Total $100,000 100%
Your IRA has a current balance of $40,000 but you do not want to use the entire $40,000, so you use $30,000 from your IRA and $30,000 from your bank account. Your total contribution amount is $60,000, and you’re a 60% owner of the property.
Tom’s IRA has a current balance of $20,000. He is comfortable using the entire amount, and will fund future property expense inside the IRA with his annual IRA contributions.
Finally, Rob does not own an IRA, so he will use some of his savings account to contribute his $20,000.
The possibilities are endless.
In the fourth and final article of this series, we’ll share information on how to use your IRA funds to invest in real estate through a Limited Liability Company (LLC).
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington 98104