In today’s environment, you don’t know whether the equity markets are going up or down, money in your bank account is earning nothing, and you want to diversify your investments. A friend or a relative comes to you and suggests pooling your money together to buy a rental property. You are going to pay cash for the place so, without a monthly mortgage payment, the rent should generate a nice return on your investment after paying for property taxes, insurance and maintenance. Sounds great, doesn’t it?
Well, it may very well be a sound investment, but don’t leap until you set the ground rules. Many real estate co-ownership arrangements are entered into — and they aren’t always for investment purposes. It’s relatively common for unmarried individuals to buy a house in which to live themselves. One method of holding the title to a co-owned property is as tenants in common. Each owner holds a separate and undivided interest in the property, and upon death, his or her undivided interest passes to heirs.
The important aspect of this is that tenants in common can sell their portions of the property. An unintended result may be that you eventually own a property with someone whom you wouldn’t have chosen to buy real estate. So, before you enter into a tenancy in common, it’s important to get a co-ownership agreement that sets out the rights and obligations of each person with a share in the property. Situations and circumstances change, so don’t be unprepared for future contingencies or disputes.
You and your friend could also form an LLC to purchase the property. The LLC would hold title to the real estate and would generally be considered a partnership for tax reporting purposes. Again, having an agreement is important because it sets the ground rules for your arrangement. One of the members is usually prevented from selling their share of the LLC to someone else without approval of the other member.
Ownership of property with someone else may prove to be worthwhile but don’t rely on a handshake when making the purchase. Get your lawyer and accountant involved in the decision making before you buy.
Diane Burge is a CPA and Principal of Weidrick Livesay & Company in Akron, Ohio.