(Newswire.net — October 12, 2020) — The Motley Fool mentions that forming a real estate holding company, or a real estate LLC is the first thing an investor should do since it’s relatively cheap and offers several tax benefits and protections. These companies initially serve as a single entity to deal with an investor’s real estate holdings, but their use extends far more than that. In this article, we’ll look at how an investor can set up a real estate LLC to handle their investments and go through the steps in creating a real estate LLC.
Step 1: Register the LLC
Investopedia defines a limited liability company (LLC) as a registered business where owners are not liable for the company’s debts and liabilities. At its heart, a holding company is simply an LLC dedicated to keeping ownership of your property. You will have to go through the process of choosing a name, registering the business with the state, choosing a registered agent, and getting an EIN from the IRS for taxation purposes.
The name you choose for your LLC can’t be the same as any other LLC registered within the state. A few other stipulations apply to the title, such as it must end in LLC, Limited Liability Company, Ltd., or some other variant. The LLC registration office in most states is linked to the secretary of state for that location. You can peruse the list of registered companies to ensure that you don’t choose one that someone else has already chosen.
When registering your LLC, you’ll be required to get an EIN from the IRS. You can file the papers for obtaining an EIN simply enough. Once you get the EIN, you’ll need to fill out several other forms, including articles of incorporation and the operating agreement. The articles of incorporation are documents required by the state that lists the company’s name, address, and the name and address of its registered agent. The operating agreement defines each of the LLC members’ roles (if there are multiple).
Step 2: Open a Checking Account
Within the US, to deal with terrorist funding from domestic sources, a business is now required to have a checking account that is separate and independent from its owner’s personal account. Banks are duty-bound not to allow business owners to deposit their company’s earnings into their own account to prevent the commingling of funds. This activity can be seen as a form of money laundering and is frowned upon. Worst-case scenarios may result in an investigation by the authorities.
From the owner’s perspective, having a clear sight of the company’s income and expenditure allows them to better plan the finances of the business. The owner can quickly figure out where most of the company’s revenue comes from and where the enterprise spends the most. Most importantly, it can help the company deal with taxes in a more straightforward manner. Business checking accounts also come with their own added perks and benefits when compared with personal funds. Consulting a local bank is the best way to figure out if you would like to open a checking account with them.
Step 3: Choose a Setup Expert to Help
While this step is not strictly necessary, you will quickly realize how difficult it is to set up an LLC on your own without professional help and advice to guide you. Investors typically consult a real estate attorney to help them set up their LLC. The process of incorporating your holding company and getting it up and running is streamlined when you use a professional. Additionally, the expert invests their time, and you simply pay them while they handle all the other fees associated with filing the paperwork and getting the business set up.
On the downside, a professional can be expensive to hire. Finding someone you trust will take time unless you ask friends or acquaintances for referrals. You’ll be charging your business’s set up to someone else entirely and won’t be sure about how the process operates. If something goes wrong, or the expert cuts corners, you’ll be left to figure out how to deal with the fallout. It’s a risk you take, which is why you need someone you can depend on to create your holding company for you.
Step 4: Get a Property Under the Business
Real estate LLCs are created to get properties and use them to generate a profit. Once you’ve set up the LLC, the next step is to get a property registered under the company’s name. Buy-and-hold owners tend to aim for rental properties that they can gain income from over time. Flippers get older or dilapidated buildings, fix them up with renovations and sell them. A holding company can work for either of these investors, but before they can even register a property, they will need to obtain funding that will allow them to purchase properties on credit.
Step 5: Locating Funding
Before you set out to look at properties, you’ll need to secure a pre-approval letter from the lending institution of your choice. The pre-approval letter will tell you the price range you should be looking at for purchase. Once you locate a property, you can move to finalize the loan. Once you decide on a property, your lender will undergo a process called underwriting, where they verify your loan application. They will order a valuation and appraisal of the property and see if it matches yours. Typically lenders take between fifteen and sixty days to close the loan and disburse the money.
Step 6: Closing
Once you’ve gotten to the point of funding the property, the final stage is closing. In this stage, the deed of the property is transferred to the buyer. In this case, you’re not the buyer, your LLC is. The deed will change hands and become the LLC property, and the holding company will have its first property. All of the documents related to the closing will be in the LLC’s name, ensuring that it owns the property.