Real estate has a wide range of uses. For instance, you can use it as your primary residence or hold onto it as an investment rental property. The ownership of a real estate property is determined through a title. There are different types of real estate ownership, with all of them determined through the title. Knowing these ownership methods will help you identify the best one that suits your needs.
Before discussing the different real estate ownership methods, you should first know that real estate is a property made up of land and a structure sitting on it. Any improvements on the structure count towards the property. This also applies to any other immovable resources that might appear on the property, including crops, vegetation, natural resources, or any minerals.
Remember that real estate can be both residential and commercial. Commercial real estate properties include warehouses, buildings, shopping centers, and other retail ventures. On the other hand, residential properties are apartments, condominiums, homes, and any other structure meant for residential living.
Here are the different types of ownership in real estate. We have also highlighted the advantages and disadvantages of some of the ownership methods.
This is one of the most common types of property ownership. It occurs when more than two individuals jointly hold a real estate title. They all have equal rights to real estate property throughout their lives. If one of the partners dies, their ownership rights are passed to the surviving tenant. This is done through a legally binding contract known as the right of survivorship. Tenants can enter into a joint tenancy all at the same time. This can happen through a title deed — the surviving tenant takes over the ownership of the deceased’s shares.
The main advantage of entering into a joint tenancy agreement is that ownership is passed to the surviving tenant in case one dies. This helps avoid unnecessary conflicts even when there is no will to clarify things. Besides, joint tenancy ownership is beneficial because the involved parties don’t have to be related or married. If the involved parties are not married, they can quickly sell the property with court-involved or partition.
This can happen if both parties agree to sell the property. Besides, there will be shared responsibility between tenants. You don’t have to spend a lot of money doing repairs or other maintenance because there will be shared responsibility. This means the involved parties equally share the financial burden related to the real estate property.
The joint tenancy ownership method has several disadvantages. The biggest downside is that any financing or use of the property to generate income must be approved by all the involved parties. Such decisions cannot be transferred by the will to an external party after a member dies because they are automatically transferred to the surviving owner.
Besides, a creditor with a legal judgment to collect a debt from one of the owners can petition the court to divide the asset and sell it to settle the debt. In simpler terms, if one of the owners is in debt, the other owners could be affected financially. This is why it is vital to evaluate an individual before teaming up on joint tenancy ownership.
Tenants by Entirety (TBE)
Unlike joint tenancy ownership, tenants by entirety can only be used by legally married individuals. This is a type of ownership in real estate under the assumption that couples are one person before the law. Therefore, the ownership method perceives them as one entity, with the title transferred to them. In case one of them dies, the other becomes a sole owner.
Tenants by entirety ownership methods come with several advantages. The biggest benefit of this ownership method is that no legal action occurs when one of the spouses dies. Besides, there is no need to write a will or probate any legal actions. Therefore, this ownership method makes it incredibly easy to manage real estate property.
With TBE, the property cannot be subdivided. The conveyance of property must also be done together. When there is a divorce, the real estate title automatically becomes a tenancy in common. This means that one of the owners can transfer their shares to whomever they wish. Therefore, cases of misunderstandings can be rampant, especially when couples divorce. This is one of the major setbacks of TBE.
Tenancy In Common
This is a real estate fractional ownership that involves two or more persons. The involved parties jointly own the property, with each one of them having equal or unequal percentages of ownership. For example, John can have 45% interest in the property while Nancy has 55%. At the same time, all the aspects of the real estate property are evenly shared by people named to the title.
That means that John is not limited to only 45% of the physical property or 45% of time or resource. Each owner has the right to occupy and use the entire property. Therefore, the percentage of ownership only indicates the financial ownership of the property.
This type of ownership lets owners individually owns the title for their respective portion of the property. Owners can dispose of the titles or encumber them at will. You can enter into this type of title anytime, even after the group has been in operation for several years before. Remember that ownership can be willed to other parties other than the existing owners with this method.
Therefore, if one of the owners dies, the shares will be transferred to their heirs. These shares will not be divided but rather given to the heirs in their original state.
Tenancy in common is beneficial because it allows one owner to use the wealth generated by their shares in the real estate property as collateral for financial transactions. Therefore, if one of the owners has a debt, only their part of the property can be auctioned. This title also makes the purchasing process easier — all the complicated legal proceedings are avoided.
One of the biggest downsides of this type of real estate ownership is that it doesn’t allow for automatic survivor rights. All the tenants share liability for any kind of debt on the property. Furthermore, several liabilities might apply for things like property taxes that can be inconvenient. The partial ownership of a home also makes it quite challenging to make decisions.
Besides, every owner is liable when an amount is due. When one of the owners is not able to pay part of their portion, all the other owners might be liable. This means that all liens on the real estate property must be cleared before the total transfer of ownership occurs. As a result, there might be significant delays in the transfer of ownership and decision-making.
This is another form of real estate ownership for spouses. It is a real estate fractional ownership method used by spouses during their marriage. Each spouse owns everything equally under this form of homeownership regardless of who spent or earned money. Therefore, each spouse will get an equal portion of the real estate property in case of death or divorce. Nine states in the US apply community property laws. These states are Arizona, California, Louisiana, Nevada, Washington, New Mexico, Wisconsin, Idaho, and Texas.
All the other properties acquired during the marriage, such as furniture, vehicles, and artwork, might be deemed community property outside of the real estate. Besides, depending on the community property state you come from, all the properties acquired during the marriage might also be counted as community property. In a state like Texas, for instance, common-law marriages are recognized. This significantly influences real estate cases.
There is a part of community property laws known as community property with the right to survivorship. This is a way for married couples to hold title to property like any other ownership method. However, this type of real estate ownership is only found in California, Arizona, Texas, Nevada, and Wisconsin. In case one of the spouse dies, ownership is automatically transferred to the other. Court cases are prevented by this ownership method, making it ideal for long-term married couples.
Sole ownership is another common type of real estate ownership. Unlike real estate fractional ownership, this method involves one entity. Only a person or entity can legally hold the property title. With this method, the common sole ownership is owned by single men and women.
It can also be owned by married men and women but as individual entities. Owners have full control over the business and can make decisions without consulting anyone. They are also fully responsible for the property and carter for all the repairs and maintenance costs.
The main advantage of sole real estate ownership is the ease with which you can accomplish transactions. Transactions are done faster because no other party needs to be consulted or involved in the decision. The sole owner can also authorize any transactions and can sell the property at will.
The obvious downside with this type of real estate property ownership is issues regarding the transfer of ownership in case the sole owner dies or becomes unable to manage it. Unless there is a specific legal documentation like a will, the transfer of ownership can become very problematic. Cases of property feud are rampant with this type of real estate ownership. Besides, the cost of managing a real estate property is high when you are a sole owner. You will have to pay for all the repair and maintenance costs. This can affect your finances, especially if the repairs are extensive.
Also known as LLC, this type of real estate ownership is common especially in commercial structures. The title to a commercial real estate can be held through a partnership known as a limited liability company. One of the biggest advantages of having shares in such partnerships is that they provide their members with limited liability. This reduces property ownership risk for other investors.
For example, if two individuals share ownership of a warehouse building through this type of ownership and a worker suffers injury on the site, the LLC will protect their assets in case of a lawsuit. Besides, owning partnerships give you tax benefits due to taxation. All of the members in the LLC pay business taxes through their tax returns, while the LLC Itself doesn’t pay taxes. In simpler terms, the cost of taxation is significantly reduced by this ownership method. You don’t have to spend money paying taxes on behalf of the LLC and it’s proceedings. By doing so, you maximize on profits.
The last type of real estate fractional ownership is an owning trust. In this case, a designated trustee manages the real estate property under the direction of a trustor. The trustor has designated one or more beneficiaries. Several entities can act as a trustee, for instance, it can be an individual or an organization. If the trustor dies, their interest is passed on to the designated beneficiaries. It is vital to know the difference between revocable trusts and irrevocable trusts.
An irrevocable trust is one that can only be terminated or modified with the beneficiary’s permission because the grantor has relinquished full control. On the other hand, a revocable trust allows the trustor to make changes to the trust. In addition, the trustor must pay tax on every income generated by the property. There are several benefits of owning a property through a trust.
For instance, a trust comes with privacy that makes it easy to manage your property. They also handle every aspect of your property. Unlike a joint tenancy ownership, this one gives you control over the property. The trustee has to involve you in every decision making process, especially if it affects the property.
Real estate is one of the biggest investment markets in the world. The many different types of real estate ownership give you a wide range of options to choose from. Having known how each type of real estate ownership works, you are in a position to make an informed decision and choose one that suits your needs.