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For many people, the idea of owning a piece of land is not only appealing but also often necessary. By starting up your own real estate holding company or LLC, you will have the opportunity to diversify your portfolio and generate passive income year-round.
It’s a good idea to place all of your investment properties under a holding company, such as an LLC, for further security, whether you’re a fix-and-flip investor or a long-term investor. A real estate holding company may be formed in a variety of ways, including online or with the assistance of an attorney.
Pro tip: Some investors form a separate LLC for each property, but this may be pricey, so having many properties in one LLC is often acceptable. If you own property in more than one state, each state should have its own LLC since rules and taxes differ from one state to the next.
The following are the six stages to starting a real estate holding company:
1. Create a Limited Liability Company (LLC) for your real estate holdings
While there are other methods to set up a real estate holding business, including an S corporation, a C corporation, a sole proprietorship, or a partnership, the most common form is an LLC. This is due to the fact that it is easy to set up and maintain while yet providing all of the liability protection and personal separation that a corporation can provide.
Choosing a name for your holding company is a part of the formation procedure. You must also register it with your state, the IRS, and get an EIN (employee identification number).
Keep in mind that your company’s name cannot be the same as any existing LLC registered in your state. The company name must end in LLC, Limited Liability Company, Ltd, or a variation that identifies the type of entity. Every state has its own LLC office, which is usually linked to the Secretary of State’s office. You may phone them, or your lawyer may be able to check online to see whether a name has already been taken.
Working with a real estate attorney is recommended since an LLC requires special documentation, which they can help with. If you don’t mind doing a bit extra effort, an online legal service like Rocket Lawyer is a low-cost alternative. If you choose this option, all you have to do is complete a brief online questionnaire, and they will begin generating your LLC documents for you, with prices beginning at $99.99. You will, however, have to complete the paperwork with state and municipal authorities on your own.
To create an LLC, you will need the following documents:
EIN (Employer Identification Number)
You will need to apply for an EIN (Employer Identification Number) online on the IRS site before you can do any of the next steps. The IRS site will give you the directions you need to complete this step. It’s also worth noting you can apply online if your business is located in the United States or its territories. You also usually get your EIN (Employer Identification Number) immediately, as soon as you apply.
Store this number in a secure location as you will need your EIN (Employer Identification Number) for the rest of the LLC filing process.
Articles of Incorporation
The articles of formation are normally filed with the Secretary of State’s Office, often known as the state’s LLC filing office, regardless of the sort of company you want to create. The office information may be found on your state’s website. It’s a straightforward document that normally includes the business’s name and address. Some states additionally provide a list of the LLC’s members.
Working Arrangements
An LLC can have one member or multiple members, and these members will be listed on the LLC Working Arrangements. This Working Arrangements defines the roles of each of the members and should be signed by each member. You can get the sample form from an online legal form service, your attorney, or an office supply store.
An LLC Working Arrangements should include:
- Rules for ownership and operations
- Percentage interests of members
- Rights and responsibilities of members
- Managing responsibilities
- How are earnings and losses managed?
Many individuals believe that after you’ve created your company structure, the following step is to transfer property ownership to it. However, there are a few more procedures you can’t afford to skip if you want to enjoy the full advantages of a holding company. This is particularly true if you haven’t yet purchased the real estate that your new real estate LLC will hold.
2. Separate checking accounts should be opened
To keep your real estate LLC finances distinct from your personal assets, you should maintain separate personal and company bank accounts. This helps with accounting and better protects the owner’s assets. It may also assist you in keeping track of your company’s purchases. Another advantage of having a separate checking account for your real estate LLC is that it allows you to manage your cash and prepare for tax season.
3. Select a Professional to Collaborate With
If this is your first LLC, you may want to engage a specialist to assist you to set it up. Because a professional is doing it for you, it saves you time and lowers your responsibility.
Typically, investors hire a local real estate attorney to form a real estate holding company. Some investors, on the other hand, prefer to do it themselves.
If you decide to deal with a real estate attorney, get a recommendation from a friend, family member, or another real estate expert. Inquire about the professional’s qualifications, and check out their website (including customer reviews) to see whether they’re knowledgeable about your state’s real estate laws.
4. Find a Property & Get It Under Contract
The major purpose of forming a real estate holding company is to preserve your personal assets and properties, therefore knowing how to discover and buy investment properties is critical. You want to select a property that meets both your investment objectives and your financial constraints.
Furthermore, before you begin your home search, you should choose a lender and get a pre-approval letter. This letter of pre-approval is required before you may look at properties with a real estate agent or make an offer on a property (unless you’re paying cash).
5. Secure Your Rental Property’s Financing
You’ve already been pre-approved, so all you have to do now is complete the lender’s application. During this period, the lender will conduct underwriting, which entails a comprehensive examination of the information on your loan application and accompanying papers.
The following are some of the papers that are required:
- Fill out the mortgage application completely.
- Purchase agreement
- Documentation proving the source of the down payment (e.g., a gift letter)
- Specifications of the property
- Current Assets and Liabilities List
- Copies of leases, and a rent roll
They’ll also double-check the property details and request an appraisal, which you’ll have to pay for yourself and will cost between $300 and $500. Some lenders demand an application fee in addition to the loan amount.
Lenders’ funding times vary depending on the type of loan, but a hard money loan typically funds in 15 days, a conforming loan in 30 to 45 days, and a commercial loan can take up to 60 days to close.
There are also particular lending alternatives available for people looking to buy distressed houses.
6. Close on the House
Closing on the property is the last step in forming a real estate holding company. This is when the property’s deed changes hands and the new owner receives the keys to the property during a settlement. This normally takes 60 to 90 minutes and takes place in the office of a title firm or a real estate agent.
You’ll have your financing in place prior to closing, and the mortgage company will provide you with a copy of your closing fees so you know what to anticipate when it comes to settlement. If you’re financing the property, you’ll need to bring certified funds, identification, proof of property insurance, and a checkbook for any additional costs.
Closing is the same regardless of whether you are purchasing the property in your name or an LLC’s name. The proceedings are the same but the required paperwork is different. For example, the title company will need a copy of your articles of organization and your Working Arrangements to verify the members of the LLC. This is mostly done to prevent fraud.
The LLC’s name will appear on the deed and other closing papers. This implies that when you move over your utilities, they will be in the LLC’s name as well. Keep a copy of your LLC documents on hand, as well as identification to prove that you are authorized to sign on behalf of the LLC.
The Benefits of Forming a Real Estate Holding Company
A real estate holding company protects investors by separating the real estate property contract, deed, and mortgage into different legal entities. To put it another way, the investor owns the holding company, which owns the investment property. This ownership arrangement, when done appropriately, shields the person against legal disputes linked to the properties.
Other reasons to incorporate your real estate holding firm as a distinct legal organization include:
Risk Reduction
The real estate contract, deed, and mortgage will all be in the LLC’s name when you buy a rental or investment property. The properties are owned by the LLC, and the LLC is owned by the investor(s). If the investor owns the homes in their own name, they are putting themselves in a more vulnerable position. This implies that if you were to face legal action, your personal assets, such as your house, would be less at risk.
For example, suppose renter slips and falls on one of your own investment properties. The tenant files a lawsuit and wins. The renter would be entitled to a payment from your personal finances if the property is in your name. If the property was owned by an LLC, the renter might sue the LLC, which would not affect your personal finances.
Tax Benefits
Combining personal and corporate finances complicates tax preparation. Furthermore, by not forming a real estate holding company, you will be losing out on the tax advantages that an LLC has.
However, you will still have to pay taxes on your LLC; the IRS regards one-member LLCs differently from those with two or more members. For tax purposes, a one-member LLC is often classified as a sole proprietorship. If your LLC has more than two members, the taxes will be passed through to each member’s personal tax return in the form of profits and losses.
The LLC doesn’t pay any federal income taxes, but some states do apply annual LLC taxes. Instead, the members fill out a Schedule E on their tax returns. Each member is also taxed on their share of the LLC’s profits as outlined in the Working Arrangements. Taxes surrounding an LLC can be complicated, so we suggest consulting with a tax professional.
Who Should Use a Real Estate Holding Company?
Both long-term and short-term investors should consider forming a real estate holding company. It’s typically suggested for all real estate investors since it shields your personal assets from the risks of property ownership while also separating your real estate revenue. The advantages exceed the expenses and effort since it’s a very affordable firm to establish and doesn’t need much management.
As a consequence, a real estate holding corporation is an excellent choice for the following:
- Flippers and fix
- Those who choose to buy and hold are known as buy-and-hold investors.
- Landlords
- Investing for the first time
Pro tip: If you’re simply buying a house to live in, a real estate holding company isn’t generally the best option. Because forming and maintaining an LLC may be expensive, it’s usually best to retain your principal house in your own name.
Setup Costs for a Real Estate Holding Company
The cost of forming a limited liability company (LLC) for your real estate interests varies by state. The charges will also differ depending on whether you set it up yourself or use an attorney. If you’re doing it yourself, the average state filing cost for forming an LLC is $127. The typical cost of hiring an attorney to put it up is $1,000 or more.
The following are typical fees associated with forming an LLC:
- Fees for filing with the state range from $10 to $800.
- EIN (Employer Identification Number): Free
- Depending on the state, annual LLC costs range from Annual LLC fees: $0 to $800, depending on the state to $800.
- Working Arrangements: $20 or more for a template
If you employ an attorney, you will be charged a single price that includes all state filing costs as well as all paperwork. The cost of forming an LLC ranges from $1,000 to $1,500. Keep in mind that you are still responsible for the yearly payments.
Instead, you might use a contracting firm such as Rocket Lawyer. Depending on the state, they provide packages that might cost a few hundred dollars. You’ll need to pay a registered agent in addition to Rocket Lawyer if you form the LLC in a state where you don’t have an address, which may cost $300 or more each year.
Most Commonly Asked Questions (FAQs)
What is the definition of a real estate holding company?
A real estate holding company is created to protect an investor from the dangers and obligations that come with owning an investment property. Holding corporations, often known as real estate LLCs, isolate revenue from a property or a group of assets, making accounting and taxes easier. Most investors should consider forming a real estate holding company.
What is a real estate holding company’s purpose?
The goal of forming a real estate holding company is to insulate your personal assets from the risks of investing in real estate. Its goal is to give tax advantages for the properties while also keeping the property’s finances distinct from your own.
Is it possible that my personal debt will have an impact on my real estate LLC?
This varies by state and is also determined by the kind of debt. However, in most situations, an LLC’s assets cannot be utilized or confiscated to pay off a personal obligation owed by one of the LLC’s members. Because this is a complicated subject, it’s advisable to get advice from a tax specialist.
To manage your properties, do you need to be a real estate agent?
To manage your own properties, you do not need to be a real estate agent. Other permits, such as a business license and rental property licenses, may be required based on the location of the properties. You may find out what is necessary for your area by contacting your local municipality.
Conclusion
We propose forming an LLC to safeguard your personal assets now that you know how to create a real estate holding business. It may also help you separate your personal and corporate assets and money. In just a few simple steps, you may establish a real estate holding corporation. After that, all you have to do now is choose the appropriate specialists and properties to collaborate with.
