Investing in real estate has long been recognized as a secure and profitable venture. There are very minimal opportunities that can grow wealth in a safe, secure way such as real estate. While many are familiar with traditional real estate ownership, there is a lesser-known avenue called TIC (Tenant-in-Common) ownership that has gained momentum in recent years. We specialize in TICs at Millcreek Commercial, and in this article we will delve into the concept of TIC investments and explore their origins, benefits, and potential for financial success. For the purpose of this article, we will give a real-world example of Dave and Dixie, a retired couple seeking to enhance their investment portfolio. Through their example, we will discover the tremendous advantages that TIC investments can offer.
The popularity of TIC ownership actually traces its roots back to the late 1970s. The utilization of Section 1031 of the Internal Revenue Code allowed investors to defer capital gains taxes by exchanging their investment property for another investment property (1031 exchange). This led to the birth of TIC investments, enabling multiple investors to pool their resources and collectively purchase high-value properties. This allows investors to invest in commercial real estate with relatively low individual capital requirements, compared to the large amount of capital traditionally needed to purchase a whole building. With Millcreek Commercial, you can invest in one of our properties with little capital—meaning you can start your real estate investment journey today—click here to get started.
Benefits of a TIC agreement:
- Diversification: TIC investments open up a world of diversification opportunities beyond traditional real estate avenues. By owning fractional interests in various properties, Dave and Dixie can mitigate their risks across different geographical locations, property types, and tenants. This diversification helps safeguard their investment portfolio against the volatility of any specific market or property.
- Access to High-Value Properties: a TIC structure provides individuals with access to lucrative properties that may otherwise be financially out of reach. Dave and Dixie can invest alongside other like-minded investors to collectively own prestigious properties such as National retail properties, medical office buildings or even surgery centers. This opens doors to secure returns and the potential of capital appreciation.
- Passive Income Generation: One of the most attractive aspects of a TIC investment is the opportunity to generate passive income. Dave and Dixie can sit back and enjoy regular income streams without the burden of day to day property management. Professional property management companies handle day-to-day operations, including rent collection and tenant relations. This passive income stream can enhance financial stability during retirement or serve as an additional revenue stream. TIC owners do need to take an active role in the property when it comes to making major decisions such as lease renewals and whole property sales.
- Tax Advantages: TICs offer significant tax advantages for investors. Through depreciation deductions, Dave and Dixie can offset rental income, reducing their taxable income. Additionally, TICs qualify for 1031 exchanges, allowing investors to defer capital gains taxes when transitioning from one real estate investment to a TIC. These tax benefits contribute to the overall profitability of TIC investments.
- Triple Net Leases and professional Lease Administration: TICs offer the advantage of professional management and expertise. Dave and Dixie can rely on the tenants of their NNN lease to handle the day-to-day operations, and a Lease Administrator to ensure that the property is well-maintained, taxes are paid, insurance is current, and tenant relations are managed effectively. All Millcreek Commercial Properties are structured where the tenant is responsible for most, if not all, day to day expenses and issues. This means Dave and Dixie can say goodbye to the Triple-T Monster: Tenants, Trash, and Toilets! A true passive commercial real estate investment is just a phone call away. This relieves the couple of the time-consuming responsibilities associated with day to day property ownership, allowing them to focus on other aspects of their lives.
- Potential for Appreciation: TICs have the potential for capital appreciation over the long term. As the real estate market evolves and property values increase, the value of Dave and Dixie’s fractional interest in the property may appreciate. This can lead to additional gains upon the eventual sale or exchange of the investment.
Inspired by the promising benefits, Dave and Dixie embark on a TIC journey. They contact Millcreek Commercial and decide to diversify between a QSR in Herriman, UT and a healthcare center in Aurora, IL. With a professional lease administrator that oversees the lease and ensures that the tenant fulfills their maintenance and financial obligations. Dave and Dixie finally enjoy a steady stream of passive income, contributing to their financial well-being and retirement plans.
Summary
TIC investments offer a compelling alternative for individuals seeking to defer capital gains taxes and diversify their investment portfolios. Originating from the Starker interpretation of Section 1031 in the 1970s, TICs enable investors like Dave and Dixie to access high-value properties, generate passive income, and benefit from wealth sheltering tax advantages. Through the power of diversification, TICs allow investors to spread their risks across various property types and geographical locations. This diversification helps protect their investment portfolio from the fluctuations of any single market or property.
The passive income generated from TICs becomes a reliable revenue stream for Dave and Dixie. With NNN leased properties that have the oversight of a lease administrator, meaning they do not need to take care of day-to-day operations, such as rent collection, maintenance, and tenant relations, the couple can enjoy the financial stability that comes from owning a cash-flowing asset without the hassle of daily management. This passive income can supplement their retirement plans or be reinvested for further growth.
TICs also come with significant tax advantages. Depreciation deductions allow Dave and Dixie to offset their rental income, reducing their taxable income and potentially lowering their overall tax liability. Additionally, the ability to utilize 1031 exchanges enables them to defer capital gains taxes when transitioning from one TIC property to another, allowing for continued growth and reinvestment.
By working with a professional commercial real estate firm such as Millcreek Commercial, Dave and Dixie can benefit from the expertise and knowledge of seasoned professionals. These experts handle the day-to-day responsibilities, ensuring that the property is well-maintained, vacancies are minimized, and tenant relationships are managed effectively. This frees up Dave and Dixie’s time and energy, allowing them to focus on other aspects of their lives and enjoy the fruits of their investment.
One of the key advantages of TICs lies in their potential for appreciation. As the real estate market evolves and property values increase, the fractional interest owned by Dave and Dixie may appreciate significantly. This appreciation can lead to substantial gains when they eventually sell or exchange their investment, further enhancing their overall returns.
In Dave and Dixie’s TIC journey, they have unlocked a world of opportunities and harnessed the power of high quality commercial real estate through TICs to achieve their financial goals. By diversifying their portfolio, accessing high-value properties, generating passive income, and capitalizing on tax advantages, they have positioned themselves for long-term financial success.
In conclusion, TIC investments provide a promising avenue for investors seeking to maximize returns and diversify their investment portfolios. With origins rooted in tax laws, TICs offer access to high-value properties, passive income generation, tax advantages, professional management, and the potential for appreciation. As Dave and Dixie have discovered, TICs can empower individuals to unlock their financial potential and secure a brighter future.
