Last Updated on January 30, 2020
According to a recent Wall Street Journal article, there are some developers that are catering to short term real estate rentals. These new condos are looking for investors that want to rent out their unit for short periods of time. Further, some developers are seeking hotel licenses for their property. These rentals may be the next big thing for a Self-Directed IRA investor. In the following, we’ll talk about how these buildings work and how you can invest in one with your retirement funds.
How Do Short Term Real Estate Rentals Work?
Typically, real estate investors look to rent out residential homes. Some will live in the house and rent out a portion of it. Others will rent out the entire house, either to one family or two or more to get the most income possible. However, short term rentals work a lot differently. Instead of renting out your property for years at a time, you rent it out for weeks or months at a time.
Popular services, like AirBnB and VRBO, already offer the ability for short term rentals. Developers are one-upping them and building multi-unit properties with short term real estate investors in mind. Further, many cities/states have laws against short term rentals. To get around those, some developers are looking at hotel licenses. However, these properties can only be occupied by the owner for 30 days at a time.
There is a concern that permanent residents of these properties may not like the idea of a revolving door or neighbors. According to the WSJ article, planners are looking at ways to make the properties secure and implementing rules on common areas, such as a swimming pool.
Using a Self-Directed IRA for Short Term Real Estate
As we talk about frequently on out blog, real estate is the most popular type of alternative investment for retirement savers. The Self-Directed IRA allows you to use retirement funds to purchase and rent out properties all over the globe. You simply need to set up an account with the correct custodian, such as IRA Financial, fund the account and start investing.
Investing in short term rentals is not new to the self-directed retirement industry. Many investors purchase houses, apartment buildings and even motels with IRA funds. Projects, like the ones being developed already, are quite new though. The ability for an investor to rent out a unit in a condominium complex is quite appealing. If the income generated is great, an investor may even opt for multiple units.
Of course, there are rules on the IRA side you must follow as well. First and foremost, you, or any disqualified person, are not permitted to utilize the property. This means you or your lineal ascendants and descendants cannot stay at the property. These include you parents, grandparents, children and their spouses. However, if you wish to rent out the unit to a sister or uncle, it’s perfectly fine. Next, all funds to purchase and maintain the property must come from your Self-Directed IRA. In addition, all income generated must likewise go back into your IRA. Lastly, it’s important to understand the UBTI rules. If you need to borrow money to purchase the property, a part of the income generated will be subject to Unrelated Business Taxable Income tax.
Real estate will always be the go-to investment for self-directed retirement savers. The addition of short-term real estate rentals will strengthen its hold on the alternative asset market. Is it right for you? That’s up to you and your financial advisor to decide.