Starting a holding company is a smart move for investors and property owners since it helps protect their assets, offers some tax perks, and makes managing finances easier. So, if you’ve been asking, “What is a real estate holding company?” I’m walking you through the steps of how to start one, its pros and cons, and the costs associated. Let’s dive in! 

What Is a Real Estate Holding Company? 

A real estate holding company is a legal entity that acts as the parent company for a single property or a large portfolio of properties. As with all businesses, there are pros and cons, but overall, a holding company reduces liability for owners if one of the holdings encounters financial trouble. It’s a way to create separation between personal and business assets so investors can confidently build their portfolios. 

How to Start a Real Estate Holding Company in 6 Steps

Starting a business is an exciting time, but figuring out the proper steps can also be stressful. Each state may have its own nuances, so be sure to keep that in mind. Take a look at the steps you need to take to learn how to start a real estate holding company whenever you’re ready. 

Step 1: Choose a Business Name 

The first step in creating a real estate holding company is to choose a name that reflects your business. It’s important to consider that each state has its own regulations regarding business names, so the name you choose should comply with these guidelines. Here are some key points to guide your decision when selecting a business name:

  • Reflect your brand and niche: Choosing a business name should really capture the essence of your real estate holdings. It should give a glimpse into your niche or specialization, whether it’s residential, commercial, or a specific type of real estate.
  • Keep it unique and memorable: A unique name is essential for legal and branding reasons. Make sure it’s different from existing businesses and easy to remember. Avoid generic or overly common names that may lead to confusion.
  • Consider future expansion: Consider your business’s long-term potential and whether the name will still be relevant if you decide to expand into other regions or markets.
  • Avoid limiting terms: Be cautious with names that include geographical or time-specific terms. While they may be relevant now, they could hinder your business’s growth if circumstances change.
  • Simplicity is key: A concise, easy-to-spell, and easy-to-pronounce name is generally more effective. It facilitates word-of-mouth referrals and minimizes potential spelling errors.

Step 2: Build Your Team of Experts 

Part of how to start a real estate holding company is having a solid team behind you since legal contracts and documents are needed. Your team should bring their own expertise to the table to help you work through complexities and make the most of your investments. If you invest in properties outside your usual area, you can lean on these experts for insights and guidance.

Attorney
Accountant
Coach or Mentor
Financial Advisor
An attorney is crucial for legal guidance on business formation, contract drafting, and compliance. They help protect your assets and navigate complex legal issues.An accountant assists with financial planning, tax optimization, and recordkeeping, ensuring your investments remain financially sound and tax-efficient. An experienced real estate mentor or coach offers valuable insights and guidance. Leverage their expertise to help you navigate the real estate market effectively.Alongside an accountant, a financial advisor assists in creating a comprehensive financial plan. They help align your real estate investments with broader financial goals.

Step 3: Select a Business Structure & Registration

Choosing the right real estate holding company structure is crucial since it will impact your legal and financial responsibilities. Consulting with an attorney or accountant will help you make the appropriate choice. The registration process varies depending on the structure you select and where your business is located, but you’ll need to complete some paperwork and pay a few fees. Successful registration secures your company’s legal identity and allows you to conduct business under its name. Here are some examples of real estate holding companies: 

  • LLC: Offer flexibility and simplicity with a favorable blend of personal liability protection and pass-through taxation. 
  • Corporation: More complex but preferred for larger enterprises looking to raise capital through stock offerings. 

Step 4: Obtain Required Licenses & Permits

An example of a NYC work permit outline the details and description of work.
Construction permit example (Source: Fast Company)

Before jumping into your holding company for real estate, you’ll need to get the proper licenses and permits. The specific requirements can vary based on your location and the type of real estate activities. Check with your Department of State to find out what permits and licenses apply to your business. Usually, real estate holding companies need tax registration certificates, and if you plan to renovate properties, you’ll also need construction permits.

Step 5: Open Business Banking Accounts

With a real estate holding company, keeping your personal and business finances separate is fundamental. This helps protect your personal assets from potential legal claims or liabilities associated with your real estate activity. It also makes it easier to report income and expenses accurately during tax time. Open dedicated business banking accounts in your company’s name, exclusively for your company’s financial transactions, including rent collection, property maintenance expenses, and tax payments.

A tablet, phone and debit card with the tablet and phone showing account summary and cash flow examples.
Financial reporting example (Source: Baselane)

Investors can use Baselane to open a bank account. It is an online platform streamlining an investor’s banking needs like opening dedicated business accounts, financial reporting, and analytics. Baselane also offers features like expense tracking and automated rent collection—identifying cost savings. The mobile application also lets you access your accounts from anywhere. 

Visit Baselane

Step 6: Purchase & Close on Properties Under Your LLC

With the legal and financial groundwork in place, it’s time to start building your real estate portfolio. You’ll also want to transfer any personal property titles to your holding company. Just be sure to leverage the assistance of an attorney or title company, as in many cases, restrictions may prevent or complicate these transfers. Once the properties are successfully acquired and titled in the name of your real estate holding company, you can begin to execute your investment strategy. This can involve using the properties as rental income, property appreciation, or other strategies outlined in your investment business plan. 

Why Form a Holding Company for Your Real Estate Investments?

When answering the question, “What is a real estate holding company,” it’s only natural to ask why you would start one. Starting a real estate holding company has many advantages for investors. However, you’ll want to make sure to do thorough research to determine if this structure aligns with your needs. Don’t forget to consider the drawbacks associated with this type of company as well.

Pros
Cons
  • Added costs from legal fees and higher interest rates
  • Provides investors with significant tax benefits by preventing double taxation, ultimately reducing overall tax expenses.
  • If investors fail to navigate capital gains tax effectively, they may face higher unexpected taxes.
  • Allows you to manage multiple properties under one company, streamlining your operating tasks.
  • You may be bound to decisions or restrictions from other investors involved in the company.

Costs of Setting Up a Real Estate Holding Company

The expenses associated with establishing a real estate holding company can fluctuate depending on whether you bring in an attorney or other assistance. Setting up an LLC is relatively affordable compared with other business structures, but it’s always important to budget for costs as part of your company’s startup expenses. Research your state’s specific requirements and fees for creating a business, as they can vary significantly. Here are some key expenses you can expect when forming a holding company:

Expense
What it is
Approximate Cost Range
Filing Fee
To create an LLC, you'll need to file articles of organization with your state's Secretary of State office.
$50 to $500
Registered Agent Fee
Fee paid to a reliable point of contact for receiving legal documents
$100 to $300
Operating Agreement
A legally binding document that outlines the internal structure, management, and operational procedures of an LLC
$100 to $500
Business License
Legal authorization issued that allows the holding company to conduct its business activities within a specific jurisdiction
$25 to a few hundred dollars
Annual Report Fee
A fee required by some states to maintain the legal status of a business entity
$35 to $500
EIN Application
A request for a unique identification number for a business
Usually free

Important note: These initial costs are just the beginning of your investment journey. Once you begin purchasing and managing real estate, you’ll encounter additional expenses. These ongoing costs may include property taxes, insurance premiums, maintenance and repair costs, property management fees, etc. Investors must budget for these ongoing expenses and factor them into their investment strategy for the long-term financial health of your business. 

Frequently Asked Questions (FAQs)

Bottom Line 

Establishing a real estate holding company is a strategic move for mitigating the personal liability and risks that come with real estate investments. Like all businesses, there are legal and financial aspects to consider, but by following the steps we laid out for you, you can build a strong foundation for your real estate endeavors. 

Have you started the process yet? Let us know in the comments below!