Real estate is considered by many to be a great investment opportunity. It's important to keep in mind, however, that like other investments, real estate is susceptible to market trends. With a high demand for real estate comes the potential for great profit, while a low demand can lead to substantial loss. Depending on how you have chosen to invest, the losses incurred by your real estate assets may extend into your personal assets. Naturally, it is important to reduce your personal liability whenever possible. A great way to achieve this with your real estate business ventures is through creation of a holding company.
What is a Real Estate Holding Company?
A real estate holding company is used to own real estate while keeping other assets separate and protected. The name of the holding company appears in the deed and the contract for a real estate asset, while keeping your name out of it. In the event that you were to apply for a mortgage to purchase real estate, the mortgage is also in the name of the holding company.
Holding Company Structure
The common choice for creating a holding company is a limited liability company (LLC). This is thanks to the relatively simple formation and maintenance of LLCs compared to that of a corporation. Additionally, the LLC structure offers the same business entity protections while retaining the option to list real estate income on your personal tax returns.
If you are interested in forming an LLC to serve as your holding company structure, you will need to file Articles of Organization with the New Mexico Secretary of State. There will be an accompanying $50 fee when you file. If your holding company will consist of additional members beyond just yourself, it is smart practice to form an operating agreement that outlines your company's management structure.
Advantages of a Holding Company
The key advantage of a holding company is that it protects personal assets from any liability associated with owning real estate. In effect, it keeps separate your personal income from your real estate income, with no worry of one effecting the other. Additionally, when forming a holding company for real estate, you can protect existing businesses that own or purchase property without worry of how the potential liabilities will affect your other assets.
Disadvantages of a Holding Company
While a holding company is generally considered a smart choice for real estate investors, there remain some disadvantages to keep in mind. For example, forming a holding company includes registration costs, as well as ongoing annual fees and any appropriate business taxes. Additionally, as with any company, a holding company requires adequate management on a consistent basis. Those without such experience may find the task difficult. However, in these cases, it is common practice to hire the services of an attorney that is experienced with holding companies.
Creating a Real Estate Holding Company
If you are interested in creating a holding company to protect your personal and real estate assets, there are a few steps required in forming your LLC. First, you will need to select a name for your LLC to register with the New Mexico Secretary of State, as well as with the IRS. By registering you will receive your company's unique employer identification number (EIN). The next step will include opening a bank account for your LLC that is separate from your personal accounts. This is an important step for protecting your assets and it has the added benefit of being helpful with bookkeeping for your company.
Once these steps are completed, your holding company will be ready to begin purchasing property. There are a number of different strategies that real estate investors implore. Some investors are interested in buying and flipping their purchases, others choose to buy and hold their properties for rental income. Any of these strategies can be achieved with your holding company and carried out in its name.
When setting up a holding company many opt to enlist the services of an attorney. An experienced attorney in both real estate and holding company formation can ensure yours is formed correctly and that all filings are completed. Additionally, if your holding company requires, our services can include drafting an operating agreement. Our LLC services also include a registered agent service for your ongoing operational needs.