Owning real estate in your own name can expose your personal assets to debts and liabilities arising out of ownership of the property.
Because of this, real estate investments should be held in an entity structure that provides you with personal asset protection, such as a real estate holding company.
What is a Real Estate Holding Company?
A corporation, limited liability company (LLC), or other legal business entity structure that is created for the sole purposes of holding real estate is commonly referred to as a real estate holding company.
A real estate holding company typically doesn't engage in business or do anything else other than hold property. This is in contrast to most companies that engage in business operations and are, thus, referred to as operating companies or management companies.
What Purpose Does a Real Estate Holding Company Serve?
A real estate holding company is primarily created to provide its owner with limited liability for debts and liabilities arising out of ownership or operation of real estate. Limited liability means that if a creditor or claimant wins a judgment against the holding company, only the assets held by the holding company can be accessed to satisfy the judgment, but not the owner's personal assets.
What is the Most Common Holding Company Structure?
Typically, a legal entity structure such as a corporation or LLC is first created with language in its bylaws or operating agreement pertaining to its purpose as a holding company, as well as, how it should be run.
Then, separate companies are formed underneath the holding company to hold a single piece of real estate each. Also, a separate operating company or management company is formed to manage the property, including contracting with tenants, collecting rent, and paying for the upkeep of the properties and other expenses.
This is the recommended structure for an investor who owns or is looking to purchase more than one piece of property because:
- It separates ownership of the property from the management of the property. This adds another level of asset protection, since any lawsuit that arises due to anything that goes wrong with the property, like an injury that occurs on the property or a contract dispute, will likely be filed against the operating company and not the parent company or the property owner himself; and
- Holding each property in its own holding company adds yet another layer of asset protection, as it insulates one property from the debts and liabilities of another.
An LLC is the preferred entity for a real estate holding company. This is because LLCs are easier to form and maintain than corporations. What's more, there are a few states, like Texas, that allow the formation of Series LLCs that simplifies the creation of multiple entities to hold multiple properties.
A Series LLC has all of the same characteristics of a traditional LLC, with the added ability to create an unlimited number of sub-LLCs (series) within the same framework.
With a Series LLC, you pay one filing fee (currently $300 in Texas) for the ability to create one master LLC with an unlimited number of sub-LLCs underneath. What’s more, as long as you treat each sub-LLC independently, with separate records and finances, each sub-LLC will be insulated from the debts and liabilities of another.
The only other way to achieve this is by forming multiple entity structures, with all of the additional associated costs and maintenance requirements.
The Advantages & Disadvantages of Real Estate Holding Companies
The biggest advantage of using a real estate holding company structure is asset protection. First of all, it protects the owner’s personal assets from the debts and liabilities arising out of ownership of the real estate. Secondly, it also allows the owner to acquire other properties or businesses, without having to be worried about how the new acquisition will affect the previous acquisitions.
The biggest disadvantage of forming a holding company is that it also requires the creation of additional entities underneath the holding company to hold the real estate. This means multiple registration fees, multiple annual fees, and all of the additional corporate formalities. But, as mentioned above, this can all be achieved with a lot less expense and hassle by using a Texas Series LLC for your holding company.
Consult With an Experienced Texas Business Law Attorney.
If you are a real estate investor who owns or is looking to acquire multiple properties, a real estate holding company can provide you with a nice, clean organizational structure with which you can manage all of your real estate investments. Furthermore, it will allow you to create multiple layers of asset protection while insulating each property from the debts and liabilities of another.
To learn if a real estate holding company can work for you, consult with an experienced Texas business law attorney. An experienced attorney can provide you with a more detailed explanation of the various advantages and disadvantages that a real estate holding company can offer to you as a real estate investor.