As a current or potential real estate investor interested in building a portfolio of turnkey rental properties, you may be wondering if you should set up a real estate holding company such as an LLC (Limited Liability Company). Most seasoned investors will tell you the answer is “yes.” But why? And how do you go about doing it?
To answer the question “why,” we discussed the advantages of setting up a real estate holding company as an LLC in our blog post “Should I form a real estate company for rental property investing?” We recommend reading that post to understand the advantages of an LLC, including the limitation of personal liability and avoidance of double taxation.
We’ll walk you through the step-by-step “how” of setting up an LLC in this post. Plus, we’ll outline the next growth-oriented steps to take after establishing your LLC. The following seven steps for setting up and growing your real estate LLC will put you on the path to success and higher profits in real estate investing.
- Choose a Business Name
- Determine your LLC Structure
- Appoint a Registered Agent
- File Articles of Organization
- Pay Filing Fees
- Create an Operating Agreement
- Grow! (Bonus Next Steps)
Know your State
Before getting started, it’s important to note that the process, requirements, and fees for setting up an LLC vary by state. Consult your state’s regulating agency to understand the process in your state. Most states' regulating agencies are part of the Secretary of State's office, so start there in your search for information.
That brings us to another point. You must set up your LLC in the state where you are doing business—the state where your rental properties are. If you own properties in more than one state, you will need to create LLCs in each state. Or, in some cases, you may register or authorize your out-of-state LLC to conduct business in the state where you hold property. This will involve additional fees, so research to learn which option is best for you—separate LLCs or out-of-state authorization.
Optional Step Zero – Choose Professionals
Is this starting to sound a little complicated? Unfortunately, government processes often are. Though some real estate investors prefer the do-it-yourself option for setting up an LLC, others find it helpful to hire an attorney to do the work. Let's call this “Step Zero.” It's not a required step, but it may be to your advantage to hire an attorney to set up your LLC. Using an attorney will cost more, but it will also streamline the process, be less work, and provide peace of mind.
You may also want to consult with a tax professional to understand the tax implications of your business structure and rental properties. High Return Real Estate’s CASHFLOW+ program is a holistic way to connect you with expert Tax Strategists and the right Attorneys to help you with these decisions.
Now that the preliminary steps of state research and optional professional consultations are out of the way let's get to the process of setting up the LLC.
1. Choose a Business Name
Your LLC needs a unique name that does not belong to any other corporation or LLC in your state. Your state will have specific naming conventions, such as the name including the words Limited Liability Company or LLC. Most states have a database you can search to see if a name is available.
You may choose one name for your LLC but prefer to operate your business under a different name publicly, perhaps for marketing or URL purposes. In this case, you will register your desired name as a DBA (Doing Business As) associated with your LLC.
2. Determine your LLC Structure
LLCs can be single-member or multiple-member in most states. Though you may operate your rental business alone, you may choose to have a spouse or other person as a member of your LLC. Conversely, some investing partners decide to create a single-member LLC. Again, you may want to consult with an attorney for help making these decisions.
3. Appoint a Registered Agent
Most states will require you to appoint a registered agent for your LLC. A registered agent is an individual or business entity who will be your business point-of-contact with the state. Your registered agent will receive your legal documents. Your state will have requirements the agent must meet, such as having a valid street address.
4. File Articles of Organization
Your LLC's Articles of Organization (which may be known by a different name in your state) contain information about your LLC in a format specified by your state. Required details are likely to include the name of the LLC, information about the member(s) and registered agent, and the address of the LLC. Your state may have a form for you to print and mail, and most states have an online submission method. Some states may also require you to post a public legal notice of your intent to file, such as in a newspaper. Once your state’s regulating agency accepts the Articles of Organization, your LLC officially exists.
5. Pay Filing Fees
At the time you file your Articles of Organization, you will pay filing fees to your state. These fees will vary state-to-state, from under $100 to a few hundred dollars.
6. Create an Operating Agreement
Many states do not require LLCs to file an operating agreement with the state. However, most LLC owners will find it beneficial to create an operating agreement anyway, especially for a multiple-member LLC. This agreement outlines ownership, rules for operating the company, and the rights and responsibilities of the members. Operating agreements can help minimize conflict within a business.
7. Grow! (Bonus Next Steps)
Now that you have formed your real estate holding company LLC, where do you go from here? There are steps to take to professionally and legally operate your LLC and some steps to help you grow to the next level in your business.
Legal and Professional Needs
To establish your LLC as a separate entity and legally operate your real estate business, you must complete additional steps. You should obtain permits and licenses, get an Employer Identification Number, open a separate bank account, and apply for a business credit card. You will also need to begin paying taxes as required, such as quarterly estimated taxes.
Transfer Ownership of Existing Properties
If you already own rental properties in your name, transfer your existing properties to your LLC. Follow your state and local government's rules and procedures to transfer title from yourself to your LLC business entity.
Acquire Financing and Properties
Now it’s time to use High Return Real Estate’s strategy to acquire cash-flowing properties with your LLC. Sometimes roadblocks occur when trying to obtain real estate financing with an LLC as the purchaser. With HRRE, you avoid these roadblocks because of our strategic relationship with a private lender. You may also choose to purchase properties with money from your self-directed retirement account. Or you can use cash, then do a cash-out refinance after a seasoning period.
Ready, Set, Grow!
No matter which avenue you choose for financing, you’ll want to focus on turnkey rental properties with immediate cash flow. With your new LLC and High Return Real Estate’s CASHFLOW+ program, you are primed for financial freedom through real estate investing. Check out HRRE’s current inventory of turnkey properties to start growing your rental portfolio today.