Expected tax savings make tenants in common (TICs) great investments. In truth, TIC commissions and fees generally outweigh any possible tax deferral benefits of the sales proceeds from the property being exchanged into a TIC. Upfront TIC commissions and fees are routinely 10 to 15% of the initial investment and are sometimes even higher than that. Financial advisors routinely receive $50,000 or more in commissions for pushing a one-time investment in a TIC without doing much more work than presenting a few different marketing brochures and persuading the investor to sign on the bottom line. Advisors also rarely monitor the TIC investment or offer any ongoing advice after the sale.
So, what are the 7 myths about Tenants in Common investments?
TICs Are Prudent Investments
TICs normally require very large investments, usually over $250,000. Prudent financial advisors recommend that investors should not place more than 10% of their investable assets in any one industry sector, including real estate. Thus, unless an investor has over 2.5 million dollars in liquid assets, a TIC investment violates the most important principle of sound investing, which is to diversify investments into different asset classes and industry sectors.
TICs Are a Smart Way to Invest in Real Estate
An investment into just one TIC results in a complete lack of diversification within the real estate sector. Diversification within the real estate sector can easily be accomplished by investing in publicly traded REITS which invest in hundreds of different properties located throughout the United States. Instead, a TIC investment results in putting all your real estate investment into a single property.
TICs Are Well-Suited for Retired Persons
Retired investors frequently need liquidity to ensure they have reliable monthly income for living expenses and access to larger sums for unexpected costs such as health care emergencies. TICs have no secondary market and investors are essentially locked into their investment regardless of their needs. Also, there is a strong possibility that investors will not receive any monthly distributions and will be required to make substantial cash calls years after the initial investment.
TICs Have Little Risk
TICs are presented by financial advisors as providing capital preservation, reliable monthly income, and a share in the likely appreciation of the commercial property. In reality, TICs are very risky investments. They are usually highly leveraged, poorly managed, and illiquid.
TICs Have Reliable Income Projections
TIC Sponsors often make misleading income projections that are based on unrealistic assumptions of low vacancy and ever increasing leasing rates. Projected distributions may also be misleading because they include a return of the investor's capital.
The Price of a TIC Property Is Based on Current Market Values
TIC investors frequently pay far more than the Current Fair Market Value for the TIC property to cover the cost of the huge commissions and fees. Financial advisors also frequently fail to conduct adequate due diligence into the likelihood that the TIC investment will be a viable long term investment if the economy slows, which usually happens at least once during the long investment horizon for TICs.
If you have questions about TIC investments, please don't hesitate to call (775) 323-5178 or contact the Law Office of Thomas C. Bradley online.