Real estate ownership has long been synonymous with honour, fortune, and credence. As a result, prospective buyers seek productive ways to invest in real estate, driving innovative trends.
While joint ownership has become mainstream among working couples, going solo has distinct merits. When an asset is held in one person’s name, that person has complete control over when to sell it, how to utilise it, and whom to inherit it.
Sole ownership establishes empowerment and is intertwined with the grit of communities, security, human capital, financial freedom and responsibilities. Also, this structure is the simplest and most easy to comprehend as it does not require any formal steps to establish.
On the contrary, this type of ownership has its pitfalls, from tax breaks to liability risks. Therefore, a prospective buyer must be well-versed in the legal aspects of sole right and weigh all the advantages and disadvantages before making any critical investment decisions.
Graana.com, in collaboration with the Iqbal Institute of Policy Studies, provides a complete guide on sole ownership in the real estate sector.
What is Sole Ownership?
One of the most basic forms of real estate ownership is sole ownership. As the name suggests, exclusive right occurs when a single person owns the real estate asset.
The ownership can be freely transferred to a third party, sold on the open market, or leased to someone else. It is often used for land, small retail properties, and multi-family rentals like triplexes and duplexes.
What are the Benefits?
Physical control over the property must be divided when two or more people hold the title. For example, when a property is owned jointly, each tenant is required to get the consent of the other before beginning any construction, making any changes, or selling the property.
However, a sole proprietor has full physical command over the real estate asset, which can be sold, modified, or rented upon free will.
Having sole ownership of the property gives the owner the freedom to leave it to whomever he wants after his passing. Even in states with a community of property, any assets deemed separate by the courts (i.e., those owned by just one spouse) may be bequeathed in a will or trust to whomever the decedent chooses, including leaving it to charity or a non-profit.
Not Restrained by Preemption
The right of preemption does not pertain to immovables subject to a sole proprietorship, as ownership is only centred in the hands of one person. There is no proportion or stakeholder ownership.
Also, the stakeholders of the same immovable are not third parties regarding preemption right. Therefore, other stakeholders are denied preemption rights in the event of a sale to one stakeholder.
As no partners are in sole ownership, the owner is not concerned about conflicts among them and has complete control over the business. This makes the decision-making process quick and efficient without any resistance. The owner is responsible for all profits and losses.
Credit Rating Depends on the Performance
If a person fails to repay the loan on the co-owned property, credit rating agencies would take notice, and the overall rating would suffer. Consequently, lenders may refuse if the other partner wants to apply for a business loan to start a small business because of poor credit scores.
However, a sole proprietorship’s credit rating is linked to the sole owner’s performance and is not affected by third-party activities.
What are the Drawbacks?
Transferring Property is Complicated
Changing real estate ownership can be drawn out and time-consuming as a sole owner’s heirs will need to probate their estate without a will. For instance, transferring property ownership to the sole owner’s successors after his death requires a lot of paperwork. It is because the inheritance laws’ rules and regulations are quite strict.
It is a difficult task to gather all the necessary paperwork in front of government officials in a timely manner, including the deceased’s death certificate and other paperwork that verifies the heirs’ relationship to them, such as a ration card or identity card.
Limited Asset Protection
It only offers a minimal level of asset protection. This implies that an investment property may be perilous if the owner is sued or has financial difficulties because income or expenses cannot be shared with third parties.
A sole owner is personally accountable for every debt, and there is difficulty in raising capital because there is no distinction made in law between personal and business assets and the owner’s ability to raise money is constrained.
The owner is responsible for all daily business decisions and is less likely to have access to large amounts of capital, and may need to depend more on overdrafts and personal savings. This results in higher borrowing costs and a lower rate of return as a result.
Every dollar an owner makes as a sole proprietor can put him into a higher tax bracket because the business income is considered personal. When a sole proprietor’s business income exceeds the expenses, the net profits must be paid as self-employment taxes.
Owning an asset in real estate is essential to living a peaceful life. However, one of the most frequent and difficult steps in buying real estate is choosing the appropriate ownership structure.
Property owners who hold the title as sole owners enjoy several distinct benefits, such as low start-up costs, maximum control, and a simple structure. However, prospective investors should also analyse sole ownership’s disadvantages before investing.