A holding company is simply a business that doesn’t do anything except own assets. Holding companies do not produce or market goods or services. Real estate holding companies are typically organized as limited liability companies and may be formed and owned by another business, an individual or a group of investors.
Reducing Exposure to Risk
One reason to create a real estate holding company is risk reduction. Suppose you own an operating business, such as a retail store. You can form a real estate holding company to own the building and land. This limits risk because the holding company is liable for any debts incurred to buy the property. In addition, should a customer be injured while on the property, the holding company is liable for legal claims. Your primary business is insulated against these financial and legal risks.
Leveraged Investment Vehicles
Real estate holding companies can also serve as leveraged investment vehicles. Suppose you create and fund a holding company, investing $1.5 million. Then you recruit other investors who put in an additional $1 million, raising the total equity capital to $2.5 million. The real estate holding company takes out a bank loan for another $2.5 million, so it now has a total of $5 million in cash. You use the money to buy a rental property company for $5 million. You now control a $5 million asset with an investment of just $1.5 million.