Are TICs for you?

Are These New Vehicles a Good Investment?

The relatively new Tenant in Common investments, commonly known as TICs, are being widely promoted as a panacea for those selling investment property, looking for a way to shelter their capital gain from tax and seeking a passive investment that will provide a stream of income. Curious about these investments, I obtained offering circulars on two of them to learn about the details.

Good in Theory
The idea behind the TICs is a good one. Many people who have owned investment property get to a point when they have little desire to continue to deal with the management headaches, and/or they want to move into an investment that might provide greater current cash flow as they approach retirement. Most of these investors are motivated to postpone the big capital gains tax they face.

A 1031 exchange is a great tool available only to real estate investors, that allows capital gains taxes to be deferred. The difficulty arises in finding suitable property and completing an exchange in the time frames prescribed by the IRS. Purchase of an interest in a TIC largely solves these two problems. To that extent, they are a great idea.

Cautionary Notes
Heavy fee burden – Most TICs carry a hefty sales commission that is solely related to the cost of organizing the TIC and selling the investment to a group of investors. It’s the sales fee, which can be 8% to 10% of the amount of your investment, that is a concern to me. Depending on the amount of your capital gain, the sales commission can eat up a substantial portion of the benefit of purchasing the TIC interest. Then if you purchase another TIC interest in 5 years because the first TIC sells the property, you pay another sales commission. Before long you could be close to paying the entire tax savings out in sales commissions.

Unproven track record – The whole TIC industry is new. I would prefer to invest in a product that had stood the test of time, and performed in all types of markets. The time will come when we will have a better knowledge of TIC performance over time, but that time is not yet here.

Mismatched motives – I like to see the managers/promoters of an investment have similar motives to those who put their money up. If the investment performs well, everyone benefits, but if the performance is disappointing, I prefer not to see the promoters doing well while I suffer. With the TICs I have reviewed, I don’t see that being the case. The promoters make out with heavy fee income regardless of how well the investment turns out for those whose money is at risk.

I am hopeful the TIC industry works out, because it solves a real problem. Personally, I plan to wait and see before committing my money to these investments.

Jack Atkin, Broker

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