Investing in property with your retirement account can be a rewarding venture. Real estate, unlike the stock market, is not subject to the same level of volatility, and the potential earnings can surpass those associated with common assets. Short-term rentals and Airbnb investing, in particular, offer an exciting opportunity due to their high turnover, especially in areas of high demand.
Understanding the nuances of what accounts can hold property, the difference between short and long-term investing, and the pros and cons of short-term rentals is crucial. This knowledge will help you make an informed decision about whether Airbnb investing is the right choice for you and your retirement goals.
What Retirement Accounts Can Purchase an Airbnb or Short-Term Rental
Only a select few retirement accounts can hold real estate assets, including short-term rentals. Each of these accounts must be designated as self-directed, giving you, the account holder, more control over your portfolio. This control allows you to invest in alternative assets, such as real estate, promissory notes, precious metals, and cryptocurrencies.
Eligible accounts include:
- Self-directed Traditional IRAs.
- Self-directed Roth IRAs.
- Solo 401(k)s
- Simplified Employee Pension (SEP) IRAs.
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
Short-Term vs. Long-Term Renting with a Retirement Account
You can hold both short-term and long-term rental properties in self-directed retirement accounts. Choosing between one or the other comes down to your retirement goals and the amount of work you want to put in.
Short-term rentals, such as Airbnbs and VRBOs, are rented out for brief periods, such as a week or two. Because stays are nightly or weekly, these properties have high-earning potential. Earning potential is bolstered by the ability to adapt pricing alongside seasonality or demand, meaning you can adjust the rental price throughout the year instead of after a long-term rental agreement ends.
If you’re considering short-term rentals as an investment opportunity, keep in mind that property management may be more intense. Turnover is more frequent, and thus cleaning and maintenance typically follow suit. Combined, these things can make a short-term rental slightly more expensive to operate and maintain.
It’s also helpful to note that zoning and regulations around rental properties vary at a local level, so always check local laws to be sure your property complies.
Long-term rentals are rented out for an extended period such as six months to a year or more. These properties can be single or multi-family properties or even commercial storefronts.
These properties can create a long-term, steady flow of income, making them somewhat less labor-intensive than short-term rentals. And, since turnover is generally less frequent, operational costs may be lower.
Still, there are some drawbacks to consider when investing in long-term rentals. Though steady, the earnings associated with long-term properties are often lower than short-term ones and you have less flexibility when it comes to adjusting rental costs.
Further, since tenants are there for a longer period, a poor tenant can be problematic, especially if you need to take legal action to remove them or address issues.
Both short and long-term rentals held in an IRA or solo 401(k) are governed by prohibited transaction rules. If you invest in either using a self-directed retirement account, you or any other disqualified person can use the property. A disqualified person includes you, your spouse, your lineal ascendants and descendants, and any entities in which these people own 50% or more. For instance, if you purchase a short-term rental to list on Airbnb, you can’t stay in the property. Spouses, ascendents, and descendants are also barred from using the property.
Pros and Cons of Short-Term Rentals with an IRA or 401(k)
If you’re considering investing in a short-term rental with your self-directed retirement account, the pros and cons can help you decide if it’s right for you.
| Pros | Cons |
| Earning potential is higher when compared to a long-term rental. | May yield higher property management costs, including cleaning and other associated fees. |
| Provides passive income for your retirement account. | Earnings may be subject to UBIT, depending on the average duration of a stay and services offered. |
| Allows for flexibility to adapt pricing based on seasonality and demand. | You cannot use the property as a vacation destination for you, your or any other disqualified person. |
How to Invest in a Short-Term Rental with a Retirement Account
1. Hire a CPA
The first thing you should do when investing in a short-term rental property with your retirement account is hire a CPA. Short-term rentals can be more complex when it comes to taxes, and a CPA can ensure you’re meeting IRS requirements.
Depending on your property and rental schedule, earnings from the property may trigger unrelated business income tax. This is most likely in scenarios when your average rental period is a week or less or you provide specific services, such as a maid service, meals, or guided tours, in your rental.
A CPA can also help you navigate both local and state tax laws, as short-term rental income is taxed differently.
2. Decide Between a Self-Directed IRA or Solo 401(k)
The next step is to choose what type of retirement account is best suited for your investment goals and financial circumstances. A Solo 401(k) can help you avoid UBIT payments and may be the best option if you’re a small business owner with no employees (other than a spouse) or have self-employment income.
If you’re a small business owner with employees, you may want to consider a SEP IRA or SIMPLE IRA.
If you’re not eligible for a Solo 401(k), SEP IRA, or SIMPLE IRA, consider a Roth. Since a Roth IRA is funded with after-tax dollars, your earnings can grow tax-free, and qualified withdrawals are tax-free.
A CPA can help you decide which option is best suited for you.
3. Hire a Property Management Company
A property management company is key to a successful short-term rental operation, especially if you don’t live near the property. It can also help you avoid engaging in prohibited transactions, either by engaging with the property yourself or relying on a disqualified person to manage or otherwise engage with the property.
The right property management company has solid reviews, transparent costs and fees, and experience managing property held in an IRA or Solo 401(k).
Be sure to check their credentials and licensing, understand their offerings, and thoroughly read the agreement before you make a selection.
Investing in short-term rentals with a self-directed IRA can be a lucrative way to save for retirement. For more information on how it works, contact a concierge team member at Horizon Trust to explain the rules and walk you through the process!
FAQs
Are there any restrictions on the types of short-term rentals I can invest in with a retirement account?
No, there are no restrictions as to what type of short-term rental you can hold in your retirement account. Short-term rentals can include vacation rentals, condos and apartments, townhomes, luxury properties, etc.
How do I handle property management and expenses for short-term rentals within a retirement account?
All short-term rental expenses, including those for property management, must be paid from the retirement account. You cannot use personal accounts to cover costs.
The best way to manage expenses for your short-term rental is to set up checkbook control for the account. Checkbook control is established when you set up an LLC in the name of your IRA or Solo 401(k) account and name yourself as the manager. Once established, you can pay for property-related expenses directly from the IRA account without going through your custodian.
