Or: Why to avoid joint tenancies and tenants in common. It is indeed ironic that the two most common and popular methods of taking ti- tie to your real estate provide you with the least protection. Joint tenancy is one of the most popular forms of holding title because it provides for a right of survivorship. This works such that if one party dies the other joint tenant becomes the sole owner by operation of law, meaning it happens automatically. Joint tenancy is popular with husband and wife couples. If the husband, for example, passes away first, then the wife has complete control of the property without having to go to court or file new deeds.
The problem for real estate investors is twofold. First, joint tenancies offer no asset protection. For example, suppose Peter, Paul, and Coco own a sixplex as joint tenants. If Paul gets sued, his creditor can reach Paul’s joint tenancy interest. Peter and Coco now have a new partner in the sixplex, most likely someone, who after suing their friend and barging their way in, they don’t like right off the bat. As well, this new partner can bring a partition lawsuit to force a sale of the property. It can get expensive in legal fees and messy in court.
Secondly, the right of survivorship feature that makes joint tenancies easy and attractive to married couples is the same feature that makes them so scary and abhorrent to investors. Let’s take another look at the joint tenancy that holds Peter, Paul, and Coco’s sixplex. Suppose Coco were to die in a fashion industry disaster. Her interest in the sixplex is automatically terminated. She can’t pass her interest on to her heirs because Peter and Paul, by operation of law, are now the two remaining joint tenants on title.
Savvy investors will not invest with you if you propose taking title as joint tenants. The good ones know that you should never put yourself in a position where someone will benefit from your demise. That’s what you are doing with joint tenancies. I will withhold comment on the state of marriage today and why so many knowledgeable spouses continue to use joint tenancies. But for investors it is not the right choice.
Similarly, but with one exception, taking title as tenants in common is not the best course, either. Again, there is no asset protection. In our example, if Peter gets sued, Paul and Coco can find themselves with a new and unwanted partner. Once again, the partner can bring a partition suit to force a sale of the property. As well, if there is a lawsuit involving the property (i.e., a tenant sues over a defective water heater) the individual tenants in common (or individual joint tenants, for that matter) can be held personally responsible. All of their personal assets can be exposed to such a claim. Holding title to any property as individual tenants in common does not make good sense in our very litigious world. In fact, it can make you more of a target.
The one exception for using tenants in common to hold title is when investors take their interest not as exposed individuals but with protected entities. In a TiC situation (“TiC” stands for tenants in common) investors come together from 1031 exchanges or with investment money to buy a large property. The large property is held as a tenancy in common with all the various investors holding their specific TiC interest through a protective entity such as a LLC (limited liability company).
While I may have let the cat out of the bag (that LLCs are good entities for real estate), it is my belief that most of you may have already known this. Still, there are a few more rules involving what not to use before we get to positive asset protection territory.