Investing in an Airbnb Using Retirement Funds

The way we travel has changed in the past few years due to the growing vacation rental industry. Vacation rentals give accessibility to superb stays with full kitchens, bedrooms, quality service, and amenities that just can’t be met by a single bed and tv in a gloomy hotel room.

Several platforms offer simple booking and rental postings, including Vrbo, HomeToGo, and FlipKey, but none have reached the mainstream acclaim of Airbnb.

The Account Holder

The account holder is the individual that has their name on the account. The IRA goes to its primary beneficiaries if the account holder passes away.

What is Airbnb?

Airbnb is an American company that serves as an online marketplace for vacation rentals and lodging. Their website allows you to create a listing for your property and for guests to book a stay. Through Airbnb, you can set up calendar rates that will enable you to adjust the cost of a visit depending on the time of year or day of the week. You can also add any other fees you want the renter to pay, such as pet or cleaning fees.

Another feature Airbnb offers is investors can choose whether they want renters to do “Instant Booking” or “contact to book.” Instant booking is an automatic system that allows renters to book as they look at the property and notify you once it has been rented. Contact to book requires the renter to send you a message to reserve the property for their stay.

How I Invest in an Airbnb in my IRA

Purchasing your Airbnb property with your IRA works the same as setting up a real estate IRA. Real estate can be bought with Traditional IRAs, Roth IRAs, ESAs, HSAs, 401 (k)s, SEP, and SIMPLE IRAs. The account just needs to be self-directed.

Steps to Setting Up Your Property

  1. Open a self-directed IRA account.
  2. Fund your account via a rollover, transfer, or contribution.
  3. Purchase the property inside the IRA.
  4. Pay all expenses associated with the property with the IRA funds.
  5. Ensure all income collected returns to the IRA.

Using an LLC

You can hold investment property in your retirement account in two different ways. The best way is through an LLC, so the investment inside your IRA is the LLC rather than the real estate property.

Using an LLC allows the property and all utilities to be titled in the name of the LLC. The LLC pays for all expenses, including repairs and maintenance, and you, as the IRA account owner, have checkbook control over the funds. All income that your investment property makes returns to the LLC.

You can also purchase investment property directly within your IRA without creating an LLC. In this instance, the property is titled in the name of the IRA, including any utilities. All income from the property would return to the IRA, and a deposit coupon would need to be provided to Midland.

When not using an LLC for your property, an extra step is added when it comes to making payments. Midland would have to cut the checks needed to pay for expenses rather than you being able to draft checks quickly from your LLC. Many Airbnb investors suggest using an LLC for quick and convenient access to their accounts.

Airbnb Investment Rules in an IRA or LLC-Owned IRA

Rule 1

You cannot have any personal use of the property.

Rule 2

The property must be held for investment purposes only. The property cannot be used as a primary or secondary residence.

Rule 3

Prohibited parties cannot stay in, use, or maintain the investment property. Prohibited parties include the IRA holder and their spouse, lineal ascendants, lineal descendants, and spouses of lineal ascendants and descendants.

Tips for Running an Airbnb

When setting up your listing, include plenty of quality photos and a thorough rental description. The best listings include details about the area and nearby tourist attractions or fun things to do.

Once your listing is set up, it is essential to prepare for the arrival and departure of your guests. The easiest way to manage your Airbnb property is to hire a property manager, especially if you do not live near your rental property.

When setting up for guests, some things to consider are your property’s temperature, opening the blinds, and leaving the outdoor light on for late arrivals. It is essential to leave a positive impression so that when your guests leave, you will receive a positive rating to ensure more people will want to stay at your rental.

It is also important to meet your guests’ needs by providing laundry detergent, dishwasher pods, paper towels, and toiletries. You may also want to provide amenities to enhance their stays, such as bicycles, a grill, pool or beach toys, or kayaks.

Another item to make your property stand out is to create a “welcome guide.” This might include ideas of places to eat, things to do, how appliances or amenities work, and contact information. Some even leave handwritten notes to guests or gift cards to a local coffee shop.

After your guests’ stay, you will want a quick turnover to prepare the property for its next stay. You can schedule housekeeping directly after departure, and this will also aid in discovering and reporting any property damages within the 3-day departure window.

Airbnb Host and Renter Fees

Airbnb charges hosts a 3% fee, and renters must pay sales tax. Airbnb hosts are paid via ACH on the first or second day of a renter’s arrival, minus the taxes and fees.

A tourist tax may also be charged to the host, which the IRA or LLC will need to pay. County taxes may be owed as well. Again, the IRA or LLC will need to pay those taxes.

UBIT (Unrelated Business Income Tax) may apply for any short-term rental. Any rentals seven days or fewer could be subject to UBIT. To combat this, you can set your property to a minimum of seven-day rentals. Consult with your CPA or tax advisor for more information to ensure you avoid paying this tax.

For more information on real estate investments using your IRA and the opportunities available at Midland Trust, visit our website or call us at (239) 333-1032.

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct any due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.