Are you planning on investing in real estate? You may want to consider forming an LLC or real estate holding company. After all, buying rental properties comes with a few unique risks, and you’ll want to protect your business. In today’s blog, we’ll discuss what a real estate holding company is, who needs one, and how to start one. So, read along to learn more about how to protect your real estate business.
Contents of This Article:
- What Is a Real Estate Holding Company?
- Who Needs a Real Estate Holding Company?
- Why Start a Real Estate Holding Company?
- How to Start a Real Estate Holding Company
- Hire Property Management You Can Trust
What Is a Real Estate Holding Company?
Real estate holding companies are legal systems designed to protect investors and business owners from risks associated with owning investment properties. Most investors or Washington DC property managers are familiar with business management and LLCs. Holding companies are generally parent companies to LLCs (limited liability companies) or corporations. That said, they don’t participate in business operations, but they’re used to reduce liability to business owners.
Holding companies are becoming more popular now, although the passing of LLCs can be traced back to the 1970s. Investors often use holding companies or LLCs to reduce personal liability and legal risk. Additionally, through a holding company, investment property owners are open to more tax benefits and ease of management compared to other legal entities.
For instance, you can use many legal entities to protect your business. However, most people choose an LLC because it’s the most common and recognizable structure. For instance, there are C Corporations, S Corporations, or Sole Proprietorship. While some options are more straightforward than forming an LLC, they don’t have the same protections. Next, we’ll go over who needs a real estate holding company.
Who Needs a Real Estate Holding Company?
Real estate holding companies are beneficial whether you’re a short-term or long-term investor. After all, they’re designed to protect your assets from business liabilities. Additionally, it’s wise to keep your personal income separate from your business income.
A few types of real estate investors can majorly benefit from a real estate holding company. For instance, fix-and-flip investors, commercial real estate investors, and passive income investors should consider forming an LLC or holding company. Additionally, first-time investors can benefit from LLCs since they provide extra legal protections.
Regardless of your investment strategy, consider protecting yourself with an LLC if you plan on investing in rental properties, fix-and-flip projects, or other real estate projects. Next, we’ll review some of the main advantages of starting a real estate holding company.
Why Start a Real Estate Holding Company
There are several reasons why real estate holding companies are beneficial for investors. By incorporating your business, you can gain access to unique benefits and improve the long-term health of your business. That said, the benefits of real estate holding companies include protection from personal liability, asset protection, and more. Read along as we touch on some of the main advantages.
Limits Personal Liability
One of the significant benefits of starting a holding company is personal liability protection. Most investors recognize that owning real estate requires a significant amount of money. It also involves a lot of large transactions and proper money management. That said, investors must protect their finances and assets.
Luckily, LLCs provide the necessary protection. For instance, if someone files a lawsuit against an LLC, it’s aimed at the company instead of the individual. So, if an LLC owns the property in question, it would protect the owner’s assets by only affecting the assets owned by the LLC. So, ultimately, your personal finances would not be affected by a potential lawsuit.
Another significant benefit of a real estate holding company is tax benefits. Some investors consider forming an LLC just for tax advantages, although liability protection is one of the main reasons to have one.
Real estate investors can avoid double taxation by acquiring properties through a holding company or LLC. Double taxation is the imposition of taxes on the same income or financial translation at two different points in time. LLCs avoid double taxation, as they’re considered pass-through entities.
The structure of a real estate holding company means that earnings go directly to the owner, who then pays taxes through their personal income tax. Since there’s no separate tax for forming an LLC, business owners can avoid double taxation. Additionally, owners of a single-member LLC can deduct mortgage interest during tax time.
Ease of Management
Finally, while there are several more benefits, another main advantage is the ease of management. The structure of LLCs makes delegating management tasks and responsibilities much more effortless. While corporations are required to have officers and directors, LLCs can be managed by their owners or a trusted third party.
One common strategy for real estate investors is to create a property management LLC that manages the rentals or contracts with the LLCs that own the properties. In turn, the property management LLC acts on behalf of the LLC that owns the rental property.
Now that we’ve gone over some of the main benefits of starting a real estate holding company, we’ll go over how the process works from start to finish.
How to Start a Real Estate Holding Company
If you want to protect your business with a real estate holding company, it’s essential to understand the steps it takes. So, here’s what you’ll need to do to start a real estate holding company.
- Choose a Company Name
- Hire an Attorney or Accountant
- Gather Documentation and Apply
- Obtain Required Licenses and Permits
- Open a Business Bank Account
- Purchase Properties Under Your LLC
Choose a Company Name
The first step in starting a real estate holding company is choosing a name for your business. Choosing a simple yet creative name for your LLC is best since you’ll be writing it down a lot, and it can represent your business and your brand. That said, your LLC may include your name, your investment company’s name, or your property’s address.
However, choose a less recognizable name if privacy is important to you. Additionally, your LLC name cannot imply you’re a corporation, bank, or insurance company (unless you are), and it cannot use obscene words or promote illegal activity. Overall, you should choose a name that’s easy to remember and represents your brand.
Hire an Attorney or Accountant
Although creating an LLC for yourself is possible, hiring an attorney or accountant is recommended to ensure you use best practices. After all, a professional attorney knows the ins and outs of managing and running a real estate holding company. Additionally, they’re helpful while buying, selling, and renting properties while protecting your assets long-term.
Additionally, it’s important to ensure you’re taking full advantage of a holding company’s financial benefits. For instance, an accountant can help maximize tax deductions and help manage the overall cash flow of your business.
Gather Documentation and Apply
Once you’ve chosen a name for your real estate holding company, the next step is to file your Articles of Organization. This process is another one in which an attorney can be beneficial. However, it’s completely doable on your own, as most states have forms available on their Secretary of State websites for you to fill out and submit via email or in person.
The main components you’ll need for the Articles of Organization include the following:
- Your business name
- The business address
- A description of the business
- Date of incorporation
- Business members associated with the company
Along with this information, you may need an operating agreement, although it’s not required in all states. An operating agreement explains how your LLC company is managed and summarizes the rules of your LLC, generally if you have other involved members. If you do need an operating agreement, you’ll need to include information about each member involved in the LLC.
Obtain Required Licenses and Permits
Regulations and license requirements differ depending on which state you’re in. To ensure full compliance, check with your state’s Department of State. However, most states require business LLCs to obtain a tax registration certificate, which allows them to conduct business in a specific area.
Additionally, if you’re a real estate developer or renovating a property, you may need to get construction permits and comply with local zoning laws and building codes.
Open a Business Bank Account
You’ll need an EIN (employer identification number) to open a business bank account. That way, you can legally separate your personal finances from your real estate holding company. Opening a business account is required to protect your personal assets from your business assets.
To open a business bank account, you’ll need the following documentation.
- EIN (Employer Identification Number)
- Articles of Organization
- Operation Agreement
- Business Licenses
Purchase Properties Under Your LLC
Once you have completely set up your LLC, you can buy new properties under your real estate holding company. If you have properties under your personal name, you can transfer them to your LLC with the help of a title company. However, if you currently have a mortgage on a personally owned property, you’ll have to check with your lender to see if it’s transferable.
Hire Property Management You Can Trust
Protecting your business with a real estate holding company is a smart idea for investment property owners. However, aside from protecting your business with an LLC, you’ll also want to consider who manages your rental properties. As such, you’ll want to hire property management you can trust to care for your properties just as you would.
If you’re looking for reliable property management, Bay Property Management Group has the experience and expertise to help your business succeed. Our top-notch property managers can help with any aspect of your business, whether marketing, tenant screening, maintenance, or more. To learn more about our comprehensive rental management services, contact BMG today!