When it comes to purchasing an investment property, there are several ways to hold title, or the legal ownership rights to a home. There is no right or wrong way to hold title, so we always recommend consulting legal, accounting, or tax advisers for the method that best suits you and your investment strategies.
Different ways to hold title
Keep in mind that title law can be complex and the rules can vary by state. Another important note is that the needs of real estate investors vary from the needs of owner occupiers. Here is a brief overview of some popular ways to hold title as a real estate investor:
A sole proprietorship is a business that has no separate legal existence from its human owner. Essentially, this is holding title in your own name. A sole proprietorship is the simplest form of ownership and is a low-cost setup option. If you are wondering in what type of real estate investment does the investor hold legal title to the property solely, the most common use methods are for a primary residence or for a first investment property. Some downsides for owning real estate in a sole proprietorship are that there is no legal protection or barrier to yourself from liability and there are no substantial tax benefits.
Joint tenancy is when two or more people own a property together with equal rights and obligations until one owner dies (also called right of survivorship). An example would be an unmarried couple purchasing real estate property together. The legal document of the home would list the owners as joint tenants.
To form a joint tenancy, there must be a unity of time, title, and interest, which means that all joint tenants must take title and deed at the same time. Some of the pros of holding title this way include avoiding probate when one of the parties dies and the ability for one tenant to inherit everything with no will or beneficiaries. This can also be a con because the deceased owners will be unable to pass any assets to their heirs.
Tenancy in Common (TIC)
A tenancy in common, or TIC, involves several owners each owning a stated portion or share of the entire property that they can sell. An example could be three or four business partners deciding to invest in properties together.
While joint tenancy and TIC are similar, a TIC allows each owner to own a different percentage, can take title at any time, and can sell their share at any time. Additionally, when one owner dies, his portion goes to his estate. Tenancy in common can be a great entry point to real estate investing for newcomers because you can own a percentage of a property. On the downside, all owners are held responsible for mortgage payments and taxes. If one tenancy member stops paying, all parties are liable.
This is a formal arrangement in which two or more parties cooperate to manage and operate a business. Partnerships typically are general, meaning each partner has the right to fully participate in management and operations and each partner is generally liable, or limited, meaning some partners are restricted from management and their liability is limited to their partnership interest.
A corporation is a separate legal entity owned by one or more shareholders. Corporations are available in two types:
- C Corporations: Separately taxable entities
- S Corporations: Pass-through tax entities and not subject to corporate income tax
An advantage of corporations is that they provide a layer of liability to protect your personal assets. Some disadvantages are that the set-up process is time-consuming and expensive and there are ample regulations with little flexibility.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a separate entity like a corporation that's structured like a partnership. LLCs are very popular because they carry liability protection for all their members. Additionally, each member is taxed individually, rather than endure the burden of double taxation corporations experience. Owning real estate through a business entity is only possible if you go through a specialized lender like Visio Lending. Most banks and conforming lenders will not allow you to hold title through an entity.
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The Visio team has decades of experience helping real estate investors successfully grow their rental portfolios without the difficulties and headaches. Contact Us today to see how we can help you.
Related: How Landlords can Form LLCs and Reap Tax Benefits in 2018, 3 Common Contingencies in an Offer Contract