Blog & Advice

Investing in Short-Term Rentals With a Retirement Account

By John Bowens

Recently, there has been a lot of interest and allure around investing in short-term rental properties and posting them on platforms such as Airbnb. If you currently don’t own any short-term rentals and haven’t done any prior research into this investment strategy, you might be wondering: What exactly are short-term rentals? Is it possible to use a retirement account to purchase and maintain a short-term rental, using an Airbnb or another platform? Is this investment strategy right for me?

What’s the difference between a short-term and long-term rental?

If the property is rented at an average of seven days or less, this is generally considered a short-term rental. If the property owner/manager is offering additional services (ex. access to a local spa, swimming facilities, etc.) and the average stay is 30 days or less, they could still fall under the classification of “short-term rental.”

A conventional rental property, which is also known as a long-term rental, is where a tenant signs a lease and pays rent monthly. Investing in long-term rental properties is a very common real estate investment strategy due to the consistent cash flow as well as the long-term stability it typically offers.

Short-term rentals, if defined as such, must be insured differently than long-term rentals. There can be “hotel tax” assessed with a short-term rental. This can depend on the county, so investors must research the market they are investing in to determine the applicable tax treatment.

Why have investors been investing in short-term rentals?

There are many reasons why investors have been looking into this real estate investment strategy. Depending on the area that you live in, short-term rentals could potentially be more profitable than long-term rental properties.

“A well-booked Airbnb rental will be much more advantageous than renting the same unit to a single tenant for a long-term rental,” said Deepasha Kakkar, the founder and CEO of Crackitt, in an article published by FortuneBuliders. “Rather than relying on a single long-term tenant with a fixed monthly payment, you can charge higher nightly rates based on your location and the reputation of your renting space as proven by numerous rental reviews left by your previous tenants.”

In addition, consider this example from Rocket Mortgage: “Let’s say you want to rent out a one-bedroom apartment in Los Angeles. As of March 2022, the average monthly cost of that apartment is $2,563, meaning you could make roughly $30,000 if your tenant signs a 12-month lease. According to AirDNA, the average daily rate for an Airbnb in Los Angeles is just over $190, with units typically occupied 67 percent of the year. This means you could make over $46,000 off your Airbnb – a significant $16,000 more than you would through traditional renting.”

Another reason why investors have been looking into this real estate investment strategy is the diversity of tenants. With long-term rental investments, you are locked in with a tenant for a certain amount of time. If that tenant is financially responsible and follows through with the lease, there is no issue. If the tenant is not consistent with rent payments or breaks the lease, your flow of income will inevitably be impacted negatively.

However, with short-term rental investments, you are allowed to be more selective with tenants and can charge tenants on a per-night basis.

Is it possible to purchase a short-term rental with a retirement account?

Yes, it’s possible to purchase a real estate investment, such as a short-term rental, with your retirement funds. Many investors utilize a self-directed IRA, self-directed Roth IRA, or other tax-advantaged account to invest in real estate.

To make the process easier, using a property manager to oversee may be an option for short-term rental investors utilizing a self-directed IRA.

There are unique rules to be aware of when investing in real estate with retirement funds: learn more.

What are the benefits to investing in a short-term rental property with a self-directed IRA?

There are plenty of benefits that come from investing in a short-term rental property with a self-directed IRA. One of the most appealing benefits is that you keep more of what you earn from your property investment. With an investment made through a self-directed IRA, your profits could be tax-free or tax deferred.

Another notable benefit is the diversification of your investment portfolio. Utilizing a self-directed IRA to invest in a short-term rental property, such as an Airbnb property, allows you to gain exposure to another sector that most retirement accounts have limited to no presence in or a limited presence. The performance of an investment in real estate is also not directly tied to stock market performance.

In addition, with an Equity Trust self-directed account, real estate investors can utilize Expense Pass. Expense Pass is a prepaid debit card that allows real estate investors to pay for expenses associated with their real estate investment with ease.

Discover how to harness the power of self-directed IRAs in your real estate investing – visit TrustETC.com for more details.

About John Bowens

John Bowens is one of the most sought-after and respected educators in the self-directed IRA industry. Currently a Senior Manager at IRA custodian Equity Trust Company, John draws from his 15 years in the real estate industry and his experience as an active real estate investor. In his travels across the U.S. and virtually, he has trained 60,000 investors during more than 300 workshops and classes, spreading the message about the power of building tax-free wealth and leaving a lasting legacy by investing in what you know best.

John contributed to the book “Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing” with Equity Trust Company Founder Richard Desich, Sr., and has appeared on several national real estate and finance-related radio shows.

About Equity Trust

Equity Trust Company is a financial services company that enables individual investors to diversify investment portfolios through alternative asset classes, including real estate, tax liens, private equity, cryptocurrency, and precious metals. Our tax-advantaged, self-directed investment accounts appeal to entrepreneurial investors who want to take control of their wealth. We offer clients a robust account management system, and wealth-building education, which enables them to grow their knowledge and complete transactions with ease.

Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.