Many people choose to invest in real estate, but this can be risky. While there is a great potential for profit due to the high demand of real estate, there is also a high potential for liability and loss. In some cases, those losses and liabilities can extend to personal assets.
The best way to reduce your personal liabilities when holding real estate as a business venture is via creating your own holding company. This type of holding company will let you own a range of real estate but still protect other assets.
How It Works
The formation of a holding company for real estate has a single purpose: owning that real estate. Your holding company acts as an entity and the deed and contract appear in the name of the company instead of your own name. In cases where you apply for financing, the mortgage is pledged with the holding company name.
The biggest benefit of forming a holding company, such as an LLC, for real estate is the protection. By creating a separate holding company to own property, you can even protect an existing business that wants to buy its own property without additional liabilities.
Downsides of a Holding Company
There are also some negatives to be aware of before forming a holding company for real estate. The formation process will come with costs, including for registration. There will also be ongoing costs, such as any annual fees and your business taxes.
Holding companies also require management, and business owners with less or no experience may find this daunting. To get around that issue, you can hire an attorney with experience dealing with holding companies.
It is common to create a holding company for real estate in the form of an LLC or limited liability company. This structure provides protections typically reserved for business entities while still making it possible for you to report your real estate income on personal tax returns.
Creating an LLC involves filing a document known as the Certificate of Formation or Articles of Organization. This is filed with your Secretary of State and will include both a fee and paperwork. Depending on the state, the fee tends to be between $50 and $200. Most states require annual renewal of LLCs, along with paying a small fee. LLCs will also apply to get an IRS tax identification number. In the case of holding companies with more members than just you, you will also need to create your Operating Agreement which outlines the company management.
Creating the Holding Company
If you have decided to protect your real estate assets with a holding company, you will want to begin by setting up your LLC. This involves selecting a name, registering the company with your Secretary of State and the IRS, and getting your employer identification number. To ensure you complete the paperwork correctly, it is best to work with an attorney who has experience in holding companies and real estate. The process will include creating and filing both the Articles of Incorporation and the Operating Agreement.
Next, you will need to open bank accounts for the LLC that are separate from any personal accounts you have. This assists with both bookkeeping and protection of your assets. After everything is ready, you can begin purchasing properties with the property you choose varying based on your goals. Some real estate investors will buy then hold property for rental income while others will flip properties. You will also need to secure the financing for the property, which will be done in your holding company’s name Finally, you close on your chosen property, once again using the holding company’s name.
The process of setting up and using a holding company for real estate can go more smoothly with the assistance of an attorney, but it will increase up-front costs slightly. This is typically worth it in terms of long-term savings and efficiency.