While often a great investment opportunity for many, it is important to remember that real estate comes with risks and remains susceptible to market trends just as any other investment. Nowadays, there are several different investment methods available to those interested in real estate. Depending on how you choose to invest, it’s possible that losses incurred by real estate assets end up extending into your personal assets. With this in mind, you will want to take steps to reduce your personal liability in those real estate assets. One such method is through the creation of a real estate holding company.
How Do Real Estate Holding Companies Work?
Real estate holding companies allow you to own real estate while reducing your exposure to the risk and liability that come with it. Additionally, when purchasing real estate assets, the name of the holding company is listed on the deed and contract, thus keeping your name private. Similarly, the holding company name would be used when applying for a mortgage, as well.
The Holding Company Structure
There are a few options available to you when choosing the business structure for your holding company. The increasingly common choice for a holding company is the limited liability company (LLC) structure. This structure is popular thanks to its relatively simple formation process and low maintenance management style when compared to that of a corporation. The LLC structure also allows you the ability to list real estate income on your personal tax return, while still providing personal liability protection.
If you would like to form a Florida LLC for your holding company, then you will need to file articles of organization with the Florida Division of Corporations. Additionally, the state of Florida requires a filing fee of $125. Also, consider drafting an operating agreement for your company. This is especially helpful if your holding company will have multiple members, as the operating agreement will outline your management structure and save you from member disputes down the road.
Holding Company Advantages
The main advantage that draws people to holding companies is the personal asset protection it offers from the risk and liability associated with owning real estate assets. The holding company structure separates your real estate income from that of your personal income, so there is no worry that one will affect the other. Similarly, when a holding company is used for real estate, you can protect existing businesses that own property or purchase property without having to worry about how those potential liabilities will affect any other assets.
Holding Company Disadvantages
Generally, choosing a holding company for your real estate assets is a safe and smart choice. However, there may be a few disadvantages that you will want to be aware of. For example, both registration fees and ongoing annual fees are required to form and maintain good standing for your holding company. Similarly, a holding company, as with any company, requires consistent management. If you lack experience in this area, you may find it is a challenging task. In such a scenario, however, it is not uncommon to hire an attorney that is well-versed in holding companies.
How to Form a Real Estate Holding Company
If you are looking to form a real estate holding company, your initial steps will include forming an LLC. To begin, you will need to choose a name for your Florida LLC that is unique to your business. Then, you must register with both the Florida Division of Corporations and the IRS. When you register your company, you will receive a unique employer identification number (EIN). Additionally, you will want to consider opening a separate bank account for your LLC and holding company, as this helps to keep personal and business accounts separate.
When you have completed these steps, you will be ready to begin purchasing real estate assets under your holding company. Whether your real estate investing strategy is aimed at buying and flipping properties or buying and holding properties for rental income, any of these investment strategies can be achieved through the holding company structure, as well as be carried out under its name.
While setting up a holding company can be achieved on your own, it is common to enlist the services of an experienced attorney. Structuring certain holding companies can be more complicated than others. An attorney can ensure that your specific company is formed correctly and that all filings are submitted. In addition to assisting your holding company formation, our services can include drafting your operating agreement and serving as your Florida LLC registered agent.
