Are you feeling uncomfortable with the economy and turbulent stock market? Do you wish you had money to invest in a tangible asset with returns that you could control?
If so, Episode 82 of the Host Coach Airbnb Investing Podcast is for you! Adam Bergman, a self-directed IRA Expert who has helped over 25,000 clients invest over 4 billion dollars of retirement funds into alternative assets - unpacks the three easy steps to invest IRA funds into an Airbnb so you can generate tax-free returns that are not dependent on Wall Street.
Topics discussed in this episode:
- How to unlock your retirement money to generate tax-free returns and control your future
- The 3 easy steps to invest IRA funds into an Airbnb
- How to diversify your retirement savings out of Wall Street and economic turbulence
- How to generate Airbnb income that is tax free
- The wealth-building strategy of tax-free Airbnb income and compounding returns in a ROTH IRA
- How to attain a sense of comfort and control by moving your IRA investments out of an unpredictable stock market
- The blended portfolio model of investing in cash-flowing Airbnbs AND wealth-building Airbnbs
- How to legally skirt Unrelated Business Income Tax on an Airbnb investment
Host Coach Airbnb Podcast Episode 82 Show Notes:
Adam, before we begin, can you explain to our listeners what is an IRA?
So an IRA is a type of retirement account. It's a way for individual investors and individual Americans to save in their retirement accoun. It takes advantage of two main benefits. Number one: traditional IRA get a tax deduction, which is great because it reduces your tax liability. Number two: you take advantage of the power of tax deferral, meaning all the money that's you make in your IRA grows tax free.
An IRA is an individual retirement account listeners, and we've all got them one way or another. Creativity and IRAs don't necessarily go together in my head. So I'm curious, did you have a personal experience or client experience that opened your eyes to new ways to use a traditional IRA?
I did. I was a tax lawyer in New York City for around eight years, worked at large law firms., I have a master's in tax law, so I consider myself a pretty sophisticated guy and I had no idea that you could use your IRA to invest in alts like real estate. How I found out was I had a hedge fund client that wanted to use his IRA to invest in a hedge fund. And I got asked to do the research... and I was blown away that you can do this! That's why I quit my job and started IRA Financial. Fast forward 15 years, we have 25,000 accounts, over 4 billion in assets, and we've helped people unlock their retirement account to invest tax of efficiently into assets like real estate.
I love those inflection points in life where you're like, "I'm doing this and then there's this whoa moment!" That's how we ended up as Airbnb investors ourselves - just different life inflection points. I read a quote from you that I thought was great: "The future of retirement isn't in Wall Street alone. It's in empowering individuals to invest where they believe." We 100% believe that Airbnb or short-term rental investing is the easiest way to build private wealth. So could you tell us how we could use our IRAs to invest further in Airbnb properties?
Investing in Airbnb Through an IRA
Going back to what an individual retirement account is: when Congress created IRAs, they didn't distinguish between IRAs that invested in stocks and IRAs that invested in real estate. The rules for IRA investing are pretty simple. In fact, there's only three things you cannot do with an IRA. You can't do life insurance, collectibles like art, and thirdly, you're not allowed to do something with your IRA that in any way directly or indirectly personally benefits you, your lineal descendants, your parents, your children, your spouse, daughter-in-law, son-in-law, or any entities 50% or more controlled by such persons. So otherwise you can do it.
Let's focus on real estate. You can buy, sell an Airbnb to a third party. You can do hard money loans to third parties as long as you're not transacting with yourself, your parents, your children, your spouse, daughter-in-law, son-in-law, or entities, 50% or more controlled by those folks. You can do it! That unlocks a world of investment opportunities and allows you to diversify. What I truly believe in is you become a better investor because you get to invest in what you know and trust.
Not Just Mutual Funds
I think that 90% of the people I've ever met in the world are completely under the impression that the only thing they can do with their IRA put it in mutual fund and that's just not the case.
No! I was one of those folks, right? I have a law degree. I have a master's in tax law. I worked at some of the largest law firms in the world. I had no idea that you can use your IRA to buy real estate or Airbnbs. There's 65 million IRA's there's over $13 trillion in IRA. money and unfortunately around 93 to 95% is invested, as you mentioned correctly in traditional assets like stocks. But Congress wants you to do alts. If they didn't want us to invest in Alts in their IRA, they could have easily excluded it. But no, all they did is excluded three categories of prohibited transactions, the life insurance, the collectibles, and then the self-dealing conflict of interest type stuff. Otherwise, you can do it.
My passion is to educate people - that's why I'm on the Host Coach Show, is to teach people that, "hey, you don't have to buy real estate with your IRA, but you have the opportunity and if you wanna do it, you can generate tax free returns." Especially with Airbnb, you get short term income. You don't have to worry about ordinary income, short term capital gains, it's all tax free back to your IRA.
Why Airbnb Fits Perfectly in a Self-Directed IRA
So what are those made advantages of using a self-directed IRA to own a short-term rental?
Okay, so number one is diversification you get to invest in what you trust and believe in, so you can diversify outside of Wall Street and invest in a hard asset, right? Like I own real estate in my IRA. I've done Airbnbs. Why do I love it? Because no matter if there are trade wars or inflation or what's going on in Wall Street around the world, I know I own something tangible. I can touch it, I can buy it, and I can rent it out, whether it's short term through Airbnbs, which I do. Or sometimes I'll go a little bit more long term - six months or a year, depending on the situation. So I get flexibility, I get diversification. I can invest in a hard, tangible asset, which is important to me, and I like real estate. So to me, it's a lot more interesting than just buying random stocks.
Gain Control of Your Wealth
And you get control, Many of us feel out of control with what's happening in the world right now - with, pick a random stock, right? Any tech stock or Administrations governments. With Airbnb, we're operating a business, we have direct impact on how successful that investment is going to be through our operations. So that's the powerful part for me. I'm not on the board at Tesla. I'm not on the board at Facebook or Microsoft, but I'm running my Airbnb business. So if I'm invested in Airbnb property I have control over the return on that cash flow is that correct?
That's correct. And that's why I love the concept of a self-directed IRA, because as you mentioned, you create your own luck. You create your own business, you get to invest in what you know and trust. So agreed, with control comes opportunity. And also I think, what comes for me personal comfort to know that no matter the stock market goes up and down... and again, I'm not telling people listening to take all your money and dump it into real estate, but the option's there if you wanna grab it it's there. And I truly believe in diversification. It's worked for me. It's worked for 25,000 plus clients that are investing in different stuff and using an IRA because of the huge tax benefits of deferral. Real estate is a really great asset.
Tax-Free Airbnb Cashflow
So that cashflow that's happening those earnings are tax deferred as long as they stay in the IRA, is that correct?
That's correct. So with a traditional IRA, the money earned in the IRA ecosystem stays in the IRA tax free. So if I get $3,000 a month for my Airbnb rental, that goes back to my IRA tax free. If I pull the money out of the IRA and put it in my pocket. If I do that after the age of 59 and a half, I pay income tax. If I do it prior to the age of 59 and a half, I pay income tax plus a 10% penalty. But once it's in the IRA, it's growing without tax. That's known as compounding returns. Rule 72, if you average a 9% rate of return, your money doubles every eight years. So taking advantage of compounding returns is super crucial. And that leads me to something called the roth IRA, which is an after-tax IRA where the distributions from the roth IRA are tax-free, not subject to any income tax, so long as you're over the age of 59 and a half, and the Roth's been open at least five years.
Wealth Building Through Airbnb Investing
Okay, so I'm 40 years old and I'm investing within my IRA. This is less of a cash flow strategy than in a wealth building strategy that $3,000 a month say a net profit. I'm not spending that, it's just compounding within my retirement account.
Correct, this is more for wealth building retirement savings. Now, if you use the Roth IRA, so let's say you can convert pre-tax to Roth, but you have to pay to tax on the conversion. For example, like me, I have all my IRAs in Roth. I have all my 401k contributions to the IRA financial plan Roth. So assuming I changed a job or I'm over the age of 59 and a half, I'll have access to those funds. But in the interm, the nice thing about the Roth is whatever you contribute to a Roth, you can actually pull out tax free the next minute, so you can wealth build. Let's say you're 30 years old and you start making a $7,000 Roth IRA contribution for the next 10 years. That's $70,000 of after tax money that you can pull at any time to live off. But the appreciation on that 70k over the years is gonna grow tax free. So once you're over 59 and a half, you can pull out all of it tax free. But if you need a little bit of cashflow over the years, you can leak some of that money out tax free so long as it's equal and not above the amount you've contributed.
Okay, so in the Roth, I've already paid income tax on the contribution. The contribution is not tax deductible. I've paid that goes in, but then the compounding or the cash flow can come out tax free?
That's it. So for example, you buy an Airbnb property for 150k. And you're collecting your $3000s a month, and in five years the property value triples. Now it's worth 400k. You sell, it goes back to the Roth IRA. But if you're over 59 and a half and the Roth's been open at least five years, you could just pull all that money out tax free, or you can just let it ride and the nice thing of Roth IRA is, God forbid you pass away, it goes to your spouse tax free, and god forbid your spouse passes your kids or your non-spousal heirs have 10 years to pull the money out tax free as well.
Hybrid Airbnb Investing
I'm also feeling that this could be a hybrid approach. We invest in Airbnb properties outside of an IRA. This doesn't have to be all or nothing, right? You could be doing some cashflow building with maybe a few properties and some wealth building with a few within the IRA. Is that right?
A hundred percent. And again, the truth of the matter is most Americans largest savings is in an IRA. $13 trillion is currently in IRAs. You can do both, you can use Airbnb for cashflow to live off, to grow your business... and then you can also have it in your IRA as a nest egg for your future for your retirement, for your family to live off after you stop working.
To those of you listening that are trying to think about where they're gonna come up with money, this is a great hybrid approach. I really like having both. So you can have a couple in your portfolio that are paying for your current lifestyle needs etc, but then have your Roth set of properties.
Financing Airbnb Properties Using IRA Funds
Do you have to purchase the property outright with the funds from the IRA or is there a combination where you can use down payment money within the IRA and then loan money as well?
When you use an IRA and there's financing, number one, the loan has to be non-recourse because unfortunately under 49-75, you're not allowed to personally guarantee an obligation of your IRA. So it has to be non recourse, which is a loan you do not personally guarantee, the second unfortunate thing is that there's something called the Unrelated Business Income tax, which is a tax imposed when an IRA uses leverage. So for example, let's say you put 100k down in your IRA and you want to borrow a 100k, because the property's 200k. You can go to a third party or a friend, just not a lineal to send it and it has to be non-recourse. But under the UBIT tax regime, because you used debt. The proportional share of the debt to the equity in this example it's 50/50. That would be subject to the UBIT tax. So let's say the property generated $10,000 of net income after depreciation, after expenses, and the 50% of that $10,000 based off this example would be obviously a UBIT tax, which can unfortunately travel as high as 37%.
It's a painful tax. But here's a way around it. If you use the SOLO 401k, so let's say you were self-employed, or you have a business with no full-time employees, instead of using an IRA. To do this, you can do a self-directed 401k, which is the same thing and has the same rules. You just need to have a business to adopt it. There's an exemption under section five 14C nine that allows a 401k to use leverage to buy real estate without this UBIT tax. So, if you work with the right people, there's always solutions. And this way it's amazing because you can leverage up your assets and you can buy Airbnb properties and I have thousands of clients that have done this. And you get the cash flow and you get the appreciation over the years!
Real Airbnb Investment Success Stories
That's fantastic. So you've mentioned helping over 25,000 clients invest over $4 billion of retirement funds. Could you share just one example of where a client has used their self-directed IRA to invest in build wealth through Airbnb's?
Oh, I have thousands. Just the simple base case, is you have an investor that wants to diversify that has some money in equities and they just feel a little bit uncertain and they want to have a little bit more control -a tangible investment asset class. We know why people like Airbnbs, they're very good rate of returns compared to long-term rentals. So the ones I've seen be very successful, at least in IRA cases is generally jurisdictions that these people have some connection to and understand the real estate market or at least work with a team that understands it. And obviously, they buy at the right price and it's easy to manage, right?
They have a third party come in, do the cleaning, manage their Airbnb revenue, and the money just flows. So how do you do it? It's three easy steps, you open an IRA, let's say with IRA financial. We'll roll the money tax free into your new IRA or self-direct IRA. You tell us where to send the money. So in that case, the LLC, let's say we call it XYZ LLC. It's owned by your IRA, managed by you. You open a local bank account. We send the a 100k to your local bank in the name of the IRA, LLC. You're the manager, you write a check to Joe, - the seller title in the real estates and the name of the LLC. And then you could collect the Airbnb rent and you can manage it. You can pay the plumber, pay party that's in charge of a maintenance. So it's super easy and then you can decide what you wanna do with it.
Mistakes to Avoid
What are some of the biggest mistakes that you've seen investors when trying to use their IRA for real estate investing and how should they avoid those?
The biggest mistake I've seen, whether it's Airbnb or just buying real estate, is it comes down to diligence - knowing what you're buying. Most of the horror stories I've seen, have been in foreign real estate. Where someone visits Belize or Cancun and they're like, "oh, this would be great to do an Airbnb here." But they don't have any local partner. They don't really understand the jurisdiction. They do it themselves instead of working with a team or an Airbnb coach. And the investment's okay, but they don't realize the cost and some of the unknown fees that come with foreign real estate. So, those are most of the problems. In the United States It's a piece of cake and thankfully the real estate market has been relatively strong in the last 10 years. My clients have done really well with Airbnbs. Their rate of returns are really exceptional.
It's always nice when there's overlap from other industry experts.
Airbnb Investing with Limited IRA Funds
I'm thinking about our listener base and all the different people that we coach and that listen in. Are there options for investors who don't have enough IRA funds to purchase an Airbnb with their IRA outright?
You can always do a loan from a nonrecourse or you can do a Joint Venture (JV), right? You can actually partner with yourself personally. So let's say you have 50K personal and 50K in your IRA and the property, it's a 100K. If you structure it you can co-invest and have a JV between you and your IRA. Or it could be you and your friend, or you and your colleague, or your brother or sister, aunt, uncle, whatever. There's tons of opportunities doing joint ventures.
How to Get Help With IRA Investing
This has been fantastic. I really love this aspect of control, over our retirement funds that we get from this asset class, you've been a wealth of knowledge. How can people get ahold of you if they have more questions? Want to learn more about your firm?
I would say the first thing is Youtube channel, @IRAFinancial it has tons of free videos and content, short and long that you can learn a lot about real estate and IRAs and all the rules. And then IRAfinancial.com just go to our website. We have a team of over a hundred people that are really focused on helping people and we don't charge for consultations. Call us with questions. You can chat us or email us. We'd love to help you and explain to you what you can do and how you can unlock your retirement money and generate tax free returns and control your future.
So there you have it. You now know the three steps to invest your IRA funds into an Airbnb to decouple your wealth from Wall Street and the economy. You also learned Adam's wealth building strategy for creating tax-free Airbnb income and compounding returns in a Roth IRA
Should you need an Airbnb coach to help you find the right market, property, and help you set yourself up for success - feel free to book a free 30 minute coaching call with us. We LOVE helping new investors avoid pitfalls and find financial freedom through Airbnb investing!
