Buying a TIC in LA – are Real Estate TICs a good investment?

LA TICs For Sale:

What is TIC ownership?

Real Estate TICs are fractional group ownership with the exclusive right to use a unit of converted apartment buildings (TICs are not condos). TICs are a new form of ownership in Los Angeles, that started to show up in about 2016. TIC stands for “Tenants in Common” which is a method for holding legal title. For buyers buying a TIC, TICs are not so much a form of ownership but rather a new property type. With affordability at all-time lows and sky-high rents, TICs offer buyers a chance to experience the benefits of owning real estate for a comparable price to rent. TICs have become one of the favorite options for both millennials and first-time buyers.

Why buy a TIC?

The number one benefits of TICs is Affordability. TICs typically sell for 10% to 20% below entry-level condo pricing. You can either use this affordability to get into the market faster or move into a better neighborhood than you normally would be able to afford in your price range. 

Is owning a LA TIC Safe?

While TICs are new to Los Angeles, they have a 40 plus year track record already in San Francisco. Owning a TIC is perfectly safe, however, the two main drawbacks with this property type that should be carefully considered before buying: Weak Associations and Limited Financing Options. These drawbacks are far outweighed by the benefits of owning vs renting. 

Consider the differences TICs Vs. Condos

Is buying a TIC a good investment?

I would say so- while we don’t have any long-term data on TIC property for appreciation yet since they are so new, I would expect them to appreciate at the same rate or slightly less than condos which average 3% – 5% long term. Tenants in Common Rental income is also quite strong. Because of limited financing options, TICs will have greater volatility to the downside and take a bigger hit on prices in a down market than condos. Land is indestructible and losses are insurable. They give you a place to live you own. 

Understanding the TIC Agreement (TICA)

Similar to the Rules and Regulations and CCRs for a condo the Tenant in common agreement is an agreement between owners in the TIC that specifies how the building operates. In the TIC Agreement you will find:

  • Monthly Dues Amount
  • Pet Rules
  • Rental Rules
  • Exclusive Use Areas versus common areas
  • Dispute Resolution
  • Default Resolution

What are the Risks of having a Weak Association?

TICs occupy a void in the market. You almost never see condo buildings with less than 6 to 8 units. That is because 2-4 unit condo developments don’t make financial sense to build new or convert.

The typical HOA board has 4 positions: President, Vice President, Secretary, and Treasurer. As you can imagine for a small building that would mean every single owner would need to be on the board just to staff those positions!

Having a weaker association means that individual owners will have more responsibility for the operation and maintenance of the building. With smaller associations they collect fewer dues and have lower budgets, so TICs don’t have professional property management companies to help with repairs or accounting. They may also have weaker reserves

Since TICs are converted apartment buildings, for utilities it is very common to see separate meters for electricity and gas, but a common water meter. The Association pays the water bill, any common area electric and gas bill, the gardener and property taxes. If one of the owners in the TIC runs into financial difficulty there is a higher risk that other owners in the association will have to foot the bill to cover those lost fees and that is the greatest risk of a weak association.

TIC Loan Financing Options:

There are only two lenders that provide TIC financing at this time: Sterling Bank & National Cooperative Bank. Since TIC loans don’t fit into Fannie Mae and Freddie Mac Guidelines the lending market for TICs is private. Expect program guidelines to change quite a lot depending on the current market conditions. Ideally you want an individual loan– some TICs have a loan against the entire building. With individual loans you are not liable in the event that other owners in the TIC default.

Gordon Friedman
415-793-5106
gordon@gordonfriedman.com

Pat Smida
415-505-2715
Pat@allcalfinancial.com

 

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