How to Start a Real Estate Holding Company in 6 Steps
Aloun Khountham is a contributor to Fit Small Business. Her real estate experience stems from over five years as a New York City real estate operations executive focused on implementing processes, procedures, and new technology solutions designed to help agents succeed.
A real estate holding company is a legal entity that helps minimize risk to protect an asset and shield property owner information. It can hold a singular asset or act as a parent company to many properties, also known as subsidiaries. To start a real estate holding company, choose a name for it, hire an attorney, obtain permits, and open business banking accounts. Many holding companies are created as limited liability corporations (LLCs), which are easier to create and manage while providing better tax benefits than a corporation.
Follow the six steps below to learn how to start a real estate holding company:
1. Research & Choose a Company Name
Like choosing a real estate company name, keep the LLC name short enough because you’ll have to continually write it out on leases and tax documents. Remember, your LLC name can also represent your brand, so you can get creative to set yourself apart from the competition.
Your company name can include your personal name, the name of your investment company, or even just the address of your property. For example, you can use “John Smith Realty LLC” or “555 Park Pl LLC” as the LLC name. If privacy is important to you, then choose a name that is not easily recognizable. This may be the case if you are a public figure or a landlord who has had legal issues in the past and wants to keep past discrepancies private.
Note that any real estate holding LLC names you choose cannot already be registered in your state or contain a copyright or trademarked phrase. To check if your desired name is available, perform a search with your local state’s database. You can check the trademark database to search for any conflicting trademarks to your chosen company name.
There are a few legal restrictions when choosing an LLC name for your property holding company. Each state has its own rules for what is allowed in a name, but many of the common LLC name restrictions include:
- Name must reflect entity status. For example, an LLC should have “LLC” or some version of the business name.
- Name cannot imply you are a corporation, bank, or insurance company unless you are.
- Name cannot use obscene words.
- Name cannot promote illegal activity.
Investors should choose a real estate holdings LLC name that is easy to remember, represents your brand, and represents the type of product or service you provide. If you find out your desired name is taken, you can make slight adjustments to make it work and get it approved. Consider your real estate website domain when choosing a name so that prospective clients can easily find your company.
2. Hire an Attorney or Accountant
Consider hiring an attorney or accountant when starting a holding company for real estate. Although it’s possible to create an LLC for yourself, a professional attorney has the experience and inside knowledge of invaluable best practices and can tell you how to start a real estate holding company. Not only are attorneys helpful in creating your LLC, they’re also helpful throughout the entire process of buying, selling, renting, negotiating terms, and protecting your assets long term.
Specifically for your real estate holding company structure, attorneys can help create operating agreements if you have partners in the LLC. The operating agreements itemize the roles and responsibilities of each member of the LLC. They can also assist with filing the articles of organization on your behalf with your Secretary of State to ensure the privacy of your information.
Only a handful of states (e.g., New York, Nebraska, and Arizona) require anyone who would like to establish an LLC to publish a notice in a newspaper before entity formation. Your attorney can assist with this publication.
Since your real estate holding company is a large capital investment, ensure you’re taking advantage of the financial benefits of a holding company. Having a real estate accountant on your team can assist with maximizing tax deductions and overall cash flow for your business. They can even help you determine how much you’ll need to charge for rent to have a positive financial standing.
Accountants can help you strategize scenarios to reduce your expenses and save money in the long run. Tax law and deductions also change every year, so having an accountant who is well-versed in the real estate investment field will only contribute to the success of your business.
If you want to tackle these tasks on your own, you can learn more about real estate investing, laws, and taxes using Coursera. Join Coursera for free and browse thousands of courses to earn professional certifications and degrees online from the comfort of your home. It’s a great way to build your knowledge and expertise in real estate investment.
3. Gather Documentation & Apply
The process of forming an LLC varies by state. Once you’ve chosen the name for your real estate holding corporation, the next step is to file your Articles of Organization. As mentioned above, an attorney can assist with this process. However, if you’d like to do it on your own, many states’ Secretary of State websites have available forms for you to fill out and include submission instructions. Once the forms are filled out, you may submit them via mail or in person.
Minnesota Article of Incorporation form (source: Articles of Incorporation)
The main components required in Articles of Organization are:
- Business name
- Business address
- Business description
- Date of incorporation
- Business members
An operating agreement is not required in all states. However, there are benefits to having one. An operating agreement explains in detail how your LLC holding company for real estate will be managed and outlines the rules of your LLC, especially if you have other members involved. Without a formal operating agreement, your LLC may resemble a sole proprietorship or partnership, jeopardizing your ability to protect yourself from personal liability.
The operating agreement should include the following items:
- Percentage of ownership for each member
- Member voting rights
- The responsibilities of LLC members and managers
- How finances will be distributed
- When and how often your LLC will hold meetings
- Rules pertaining to buying out other members or transferring interests
Another key component in setting up a company to buy property is to obtain an employer identification number (EIN) for each LLC. The EIN acts like a Social Security number for your business and is assigned to you by the Internal Revenue Service (IRS). An EIN can help protect your business against identity theft and assist with building credibility as a business.
It is a requirement that all multimember LLCs have an EIN, allowing your company to file and pay taxes. However, if you are a single-member LLC, you must elect to be taxed as a corporation. Otherwise, you may be considered a “disregarded entity,” and the LLC’s activities should be reflected in the owner’s tax return. This is another benefit of having a real estate accountant on hand.
4. Obtain Required Licenses & Permits
The regulations and licensing requirements for LLCs also vary by state. Check with your state’s Department of State to ensure compliance. Many states will require business LLCs to obtain a tax registration certificate that allows them to conduct business in a specific area. If you are a developer or performing renovations on your property, you may be required to get construction permits and comply with local codes and zoning laws.
Sample tax registration certificate (Source: Alignable)
5. Open Business Banking Accounts
To open a business bank account, you must have an EIN. A business bank account helps legally separate your personal finances from your real estate holding companies. This separation is a requirement to protect your personal liability from your business.
To benefit from this corporate veil, investors should never commingle their financial affairs by using company money for personal reasons. Even your company credit cards should be created under the business name and used exclusively for business purposes. According to the Small Business Administration, you’ll need the following documents to open a business bank account:
- Employer identification number (EIN)
- Articles of organization
- Operation agreement
- Business licenses, if applicable
Investors can contact their current personal banking institution to see if they offer business accounts. This is the easiest way since you already have an established relationship with the bank. However, if you’re looking to obtain a line of credit for your investments, then you can sometimes bank with your mortgage lender or their preferred bank, which could yield some incentives.
For more information on opening business bank accounts, visit our article Best Business Bank Account Promos & Offers.
6. Purchase & Close on Properties Under Your LLC
If you currently own investment property under your personal name, you may want to transfer the property to your newly formed LLC. This does require you to record the change on the deed. A title company is able to assist with this process. However, if your current property has a mortgage, you should contact your lender. Sometimes a lender will require you to pay the mortgage in full prior to transferring the property.
For obtaining new property under your real estate holding company, you should first develop a business plan to help set guidelines and goals for your holding company. An LLC must purchase new properties with its own funds to ensure no confusion as to who owns it. LLCs can obtain mortgages in the holding company’s name and will be approved based on the company’s credit score and financials.
Some investors want to create a holding company for rental property. The process to purchase a multiple-family building is similar to a personal purchase, except during the financial lending portion, you would use the information of your property holding companies. Using an LLC to close on a property is only allowed if the property is not a primary owner-occupant home, and some lenders will not allow mortgages under LLCs.
Costs of Setting Up a Real Estate Holding Company
The cost to set up a real estate holding company varies based on whether you enlist assistance from outside vendors. An attorney or accountant will charge you for their time, but you will be responsible for paying any fees associated with the creation of the LLC.
The filing fee will be your biggest expense, and, depending on the state, will run you between $40 and $500. Your state may also require you to pay an annual fee and fees for your business licenses and permits. Since Arizona, Nebraska, and New York require you to publish a notice, you’ll have to pay around $40 to $2,000 to publish your LLC in the newspaper.
Who a Real Estate Holding Company Is Right For
Creating a holding LLC for properties is a good fit for any investor looking to purchase property for use other than their primary residence. Although real estate is a great investment, it is susceptible to market changes and can create a significant financial loss for some investors. All investors should keep the losses incurred by their real estate investments separate from their personal assets, and a holding company will provide that protection.
For property that is being rented out to tenants, property holding companies protect the owner in the event there is a lawsuit or liability caused by the property. Not only are you protecting your personal liability, but you are also protecting other properties and partners involved in your portfolio.
Why Form a Holding Company for Your Real Estate Investments?
There are advantages and disadvantages to creating a real estate holding company. Asset and liability protection is one of the main benefits, but there are also tax benefits like preventing double taxation, which would reduce your tax expenses. A holding company also allows the opportunity to purchase property abroad and more leeway on how profits are distributed.
Although a holding company is a smart choice for many investors, there are some disadvantages. Creating multiple LLCs can incur additional costs, especially if you have to pay legal fees to assist with the process. Holding companies may be susceptible to higher taxes if they are unaware of capital gains tax and how to avoid paying them. For the newer investor, managing the holding companies and their financials may seem daunting.
We’ve outlined some additional pros and cons of having a real estate holding company:
| PROS | CONS |
|---|---|
| Protect personal assets | May need to pay transfer taxes on properties |
| Can register in multiple states | Access to financing under government programs like FHA loans are unavailable to businesses |
| Ability to defer paying capital gains tax | Interest rates may be higher for LLCs |
| Business is not subject to double taxation | Some property types, like co-ops, are not keen on selling to business entities (rather than individuals) |
| Receive better loans and line of credit offers | Can mistakenly mix business and personal finances |
Bottom Line
For new investors, learning how to start a real estate holding company may seem intimidating at first. However, all investors should protect their personal assets and minimize risk, especially if they plan to invest in multiple properties. The benefits of having a holding company can significantly outweigh the startup costs, so investors should take advantage of the financial benefits and make the best decision for their business.
