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  • Elias Zeekeh, MBA, CPA, CMA

Real Estate Investing in a Holdco: Pros and Cons

A holding company or Holdco for short is a corporation whose sole purpose is to hold assets. Generally, there are two benefits and or reasons why people want to hold assets in a corporation. Firstly, there is limited liability. So if you’re sued as the landlord a corporate structure can help protect your personal assets. Secondly, there are income tax benefits. You can take excess cash from the company in the form of dividends, which receive preferential tax treatment relative to most other forms of income.

Though the above reasons are compelling to start a holding company, note that most lenders will still require a personal guarantee. This means you can’t benefit from corporate protection as far as the loan is concerned. Should the loan default the lender can pursue both you and the corporation. Only in a few cases may a personal guarantee not be required. For example, if the company has a high asset base and long history of consistently positive cash flow a personal guarantee may not be required.

Furthermore, understand that borrowing in a company will reduce the number of potential lenders dramatically down to a small handful. You may also have to pay a slightly higher interest rate (up to 20 bps). There will also be a higher level of scrutiny from lenders on the loan, and it will be near impossible to get financing approved within the standard five day conditional period for most residential purchase agreements. Consult with a qualified mortgage broker for more information.

Note: There are ways to buy in personal name and transfer to a holding corporation later. Consult with an experienced Real Estate lawyer to learn more.

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