So you and Uncle Benny want to buy a rental unit together. He's got the down payment money. Your income will most assuredly make the deal work. The rentals in your area are creating positive cash flow of up to $500 per month. Hey, that's $6000 per year (as long as there are no major household breakdowns). So, what's not to like?
Well, what if you find out later that Uncle Benny took out a cash advance from one of his credit cards, so naturally, he wants that payment of $150 to be paid each month out of the cash flow before you two touch the money (he says). So now you're not so interested in owning the rental with him anymore.
Or in another scenario Uncle Benny's got plenty of money and he wants to buy you out, or worse, your good old uncle dies of a heart attack while fixing up the fixer upper. So what happens when a partner/co-owner of a piece of real estate passes away or wants to get out of the ownership of a property?
How you hold title to the property is one of those points in the transaction that need to be discussed, researched in detail, and then decided upon before you sign the bottom line to the deed transfer, mortgage and all the other pieces of paper involved in owning real estate.
Because of the last few years' strong appreciation, to purchase in some markets it may take a larger down payment, combined with stronger qualifying (i.e., multiple incomes) to purchase a property that will pay out a positive cash flow month after month.
As you are looking to find a partner/co-owner of a real estate property, keep in mind that the way such a joint-ownership takes title differs than the way a married couple would take title -- usually joint tenancy. In joint tenancy, when one owner dies, the deceased person's interest in the property passes on to the other title holder.
One of the best side-by-side explanations of the various forms of title ownership can be found at California-based Fidelity National Title Insurance Company website.
The determining factor for partners' choice of title depends on how they want the property to pass or not pass to their heirs (for one thing).
Joint tenancy is the way most married couples hold title. If one spouse dies, the ownership automatically passes to the other owner. However, this can also work with co-owners who are not married. Let's say you own property with four other owners and one of the owners dies under a joint tenancy title. The remaining three owners would absorb the interest of the deceased owner. No probate would be required under this form of title.
Tenancy in Common is another common way of holding title for co-investors. The shares of the property can be held in equal or unequal parts. Let's say four investors partner together to buy a piece of real estate and they decide to divide the interest of the property according to the percentage of the amount of down payment each brought into the transaction. Thus, if each brought in 25 percent of the down payment, then they would each own a quarter of the property.
In Tenancy in Common, however, if one of the owners dies, his portion of the ownership passes to the heirs. Thus you can use real estate as part of your estate that can be passed down to your children and grandchildren. In addition, those individual shares can also be sold separately without the approval of the other tenants in common. Keep in mind, however, that legally, those individual shares of title can also be used to satisfy someone's credit problems. Which means if one of your co-owners files bankruptcy, the creditors could come in and force him to sell his share of the investment to satisfy debts.
When deciding on holding real estate with co-investors be sure you know exactly what form of title you should be holding to protect your wealth-building plans.