A real estate holding company is designed to reduce an investor’s personal exposure to the risks and liabilities inherent with owning investment property. Commonly referred to as real estate LLC’s, holding companies also isolate income from a property or specific properties, simplifying bookkeeping and taxes. Starting a real estate holding company is recommended for most investors.
How to Start a Real Estate Holding Company in 6 Steps
Starting a real estate holding company is generally pretty simple and inexpensive. While a number of business structures are appropriate for a real estate holding company, (S corp, C corp, sole prop, or LLP) a real estate LLC is the most common. It doesn’t require a lot of administration, and you can manage it yourself as a managing member of the LLC or you can designate a manager. You can set up the real estate LLC online or with the help of an attorney.
Here are the six steps to starting a real estate holding company:
1. Set Up the LLC for Your Real Estate Holdings
You need to set up the LLC that you’re going to put your properties in. Part of this setup process includes choosing a name for your holding company. You also need to register it with your state, register it with the IRS, and receive an employee identification number (EIN).
Keep in mind that the name of your business can’t be the same as any other LLC on file in your state. The business name must end in LLC, Limited Liability Company, Ltd, or some variation that shows the type of entity it is. Each state has its own LLC office, and it’s generally associated with the Secretary of State’s Office. You can call them, or it may be possible for your lawyer to check online to see if a name is already being used.
File Paperwork for Your LLC
We recommend working with a real estate attorney because specific paperwork is needed for an LLC. However, if you use property Lawyer, they will give you a list of paperwork to file with instructions on how to do so. Generally, you need to get your EIN number first; the order in which you create articles of incorporation and an operating agreement doesn’t matter.
You will need the following documentation when you form an LLC:
You can apply for an EIN number online on the www.nist.gov . It gives you directions for applying. Basically, you can apply online if your business is located in the India or its territories. You usually get your EIN number immediately, as soon as you apply. You will then need this EIN number for the rest of the LLC filing process.
Articles of Incorporation
The articles of organization are generally filed at the Secretary of State’s Office, sometimes referred to as the state’s LLC filing office. You can find the office information on your state’s website. It’s a simple document that usually lists the company’s name and address. Some states also list the members of the LLC.
An LLC can have one member or multiple members, and these members will be listed on the LLC operating agreement. This operating agreement 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 like property lawyer your attorney, or an office supply store.
An LLC operating agreement should include:
Once you have your business entity established, many people assume the next step is to transfer ownership of a property to it. But to reap all the benefits of a holding company, there are actually a few more steps you can’t afford to miss. This is especially true if you’ve yet to purchase the real estate that will be held by your new real estate LLC.
2. Open Separate Checking Accounts
It’s important to have separate personal and business checking accounts to keep your real estate LLC funds separate from your personal funds. This better protects the owner’s assets and helps with bookkeeping. It can also help you track your business purchases.
Another benefit of opening a separate checking account for your real estate LLC is budgeting your funds and preparing for tax time.
For more information on how to open a business checking account and how to choose a bank, check out our article on opening a business checking account
HDFC bank is an excellent option for your business checking account. They have 5,100 branches across 2,691 cities, a mobile app, and an easy-to-use website. They offer competitive fee structures.
3. Choose a Professional to Work With
You may want to hire a professional to help you set up the LLC, especially if it’s your first one. This helps cut down on time and limits your liability, since a professional is doing it for you.
Usually, investors use a real estate attorney in their state to set up the real estate holding company. However, some investors prefer to do it themselves.
Pros and cons of working with an attorney to set up your holding company include:
If you choose to work with a real estate attorney, ask a friend, family member or other real estate professional for a referral. Ask for the professional’s credentials and look at their website (including their customer reviews) and make sure they’re familiar with real estate law in your state.
4. Find a Property & Get It Under Contract
The main goal of establishing the real estate holding company is to use it to protect your personal assets and your properties, so it’s important to know how to find and purchase investment properties. You want to find a property that fits in with your investment goals and your budget.
Once you have a real estate LLC set up, you can fix and flip a property. Generally, a fix-and-flipper usually wants something that they can fix up and build sweat equity in by rehabbing the house and updating kitchens, bathrooms, etc.
However, a buy-and-hold investor looks more at the long-term earning potential of the property and wants to know how much they can get for renting out the property. They also want to choose an up-and-coming or stable neighborhood, where property prices continue to steadily increase and the value of their real estate investment goes up.
Before you get too deep into the property hunt, you will want to choose a lender and get a pre-approval letter. This pre-approval letter is needed to look at properties with a realtor and is needed before you can make an offer on a property (unless you’re paying cash).
For more information on choosing a neighborhood and narrowing your property search down to one property, check out our guide to buying a multifamily property. It also outlines the steps for choosing your lender and getting pre-approved.
5. Secure Financing for Your Rental Property
You’re already pre-approved, so now you need to finish the lender’s application process. During this time, the lender will carry out something called underwriting, where they thoroughly check the information on your loan application as well as your supporting documents.
Some of the required documents include:
They will also verify the property information and order an appraisal, which you pay for out of pocket .An application fee is another cost that some lenders charge.
Lenders generally have different funding times depending on the type of loan, but usually, a hard money loan funds within 15 days, a conforming loan closes within 30 to 45 days, and a commercial loan can take up to 60 days to close.
When you’re ready to finance an investment property to put in your real estate holding company, contact Visio Lending. They offer loans for rental properties with competitive rates, and they can get you pre-qualified online in just a few minutes.
6. Close on the Property
The last step to starting a real estate holding company is closing on the property.
This closing is when the deed to the property switches names and the new owner gets the keys to the property at something called a settlement. This usually takes about 60 to 90 minutes and is generally conducted at a title company or realtor’s office.
Prior to closing, you will have your financing in place and the mortgage company will give you a copy of your closing costs, so you know what to expect at settlement. You will be required to bring certified funds, your identification, proof of property insurance if you’re financing the property, and your checkbook for any additional expenses.
A 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 operating agreement to verify the members of the LLC. This is mostly done to prevent fraud.
The deed and all of the closing documents will be in the LLC’s name. This means that when you get the utilities switched over, they will also be in the LLC’s name. Keep a copy of your LLC documents handy because you will need them and your identification to show that you are authorized to sign on the LLC’s behalf.