If you want to invest in an Airbnb, but feel stuck because you don't have the capital - this episode could completely change the game for you!

Most people think the first step to buying an Airbnb is saving for years or taking on risky loans. Meanwhile they've got tens - sometimes hundreds - of thousands of dollars sitting in their 401(k) or IRA.

And they have no idea they could be using it to buy real estate.

Today, an IRA expert who has seen a 350% increase in his clients using their retirement accounts to invest in short-term rentals is breaking down how you can legally use your 401K or IRA to purchase an Airbnb — without triggering taxes or penalties — and turn that stagnant retirement money into real, tangible cash flow!

Topics discussed in this episode:

• How to use your 401(k) to buy an Airbnb
• Why Airbnb investing beats the stock market
• The IRS rules that could blow up your Airbnb investment
• How to use a Checkbook IRA to control your Airbnb like a business
• How to fund your Airbnb in 2-3 weeks

Episode 121 Show Notes  

Owen, A lot of people want to invest in Airbnb's for financial freedom, but they feel stuck at the very first step: capital. What are the ways you're seeing people actually find the money to invest in their first Airbnb?  

It's not exactly publicly advertised out there that you can use retirement dollars to go into real estate. I think that option of using retirement money surprises people. So how can they unlock that equity in the retirement account to invest in Airbnb, and why don't more people know it's even possible? 

It is really not that well known. So only 4% of IRAs in the United States are self directed. So meaning it's not in managed money. Most folks don't understand that if you have an IRA or 401k, you can move that money over to a self-directed account, and and then from there  we can use that money to invest directly into real estate and a wide range of other investments, also. 

Self-DIrected IRAs De-Mystified

For our listeners, and even for me- everybody knows what an IRA is, but specifically what is a self-directed IRA in plain English? 

In a nutshell, a self-directed IRA allow people the freedom and flexibility to invest outside of Wall Street, so you can invest that money into real estate, private companies, private lending, just a wide range of other items that aren't directly in the stock market.

Okay, so you specialize in self-directed IRAs. 

Advanced IRA, we work with just over 17,000 clients nationwide. We allow folks to invest into a wide range of alternatives and not just the stock market. Our clients are focused on investing into real estate and other investments. 

And what was the statistic on roughly what percentage of your self-directed IRA customers invest specifically in short-term rentals? 

The latest estimate that we had was between 18 to 20%. We can't really get the exact number because we have a lot of clients that use what we call a checkbook IRA LLC to invest into Airbnbs and rental properties. But we have seen over 350% increase over the last five years alone for people that are going into short-term rental. So again, that's an area that we're certainly seeing a lot of traction  

What does that tell you about where real estate investors are heading? 

Investors are getting a little bit more hands-on with real estate. Investors are not just looking to buy a simple, like duplex or a long-term rental. They're looking to buy something that they can use for short-term rentals. So, we are seeing that category really expand nationwide right now.  Three and a half times. Wow.  Yeah, just over the last five years it is a really big increase.

Why Airbnbs Are a Better Investment Than Long Term Rentals

In your personal opinion, why do you think Airbnbs have become such a popular investment vehicle compared to more traditional real estate? 

With the Airbnb, the customer's ultimately in control of that piece of real estate, so they can set the rates. Basically it's gonna just allow for heavier cash flow to come back into the IRA account when they own, for example, a short term rental property that they're using for Airbnb versus a longer term normal rental.  

We say that all the time. We say that Airbnb investing is the highest cash flow return possible from real estate that we've ever experienced cash on cash returns. Do you have any stories of any clients who used self-directed IRA to invest in Airbnb and ended up exceeding their original expectations, either financially or from a lifestyle perspective? 

We had a client, they bought a property back in 2018 for $240,000. They basically had it out as a long-term rental for one year with, with one person that was in there. They were charging $2,000 a month rent. So that year they made $24,000 in rental income. The very next year they listed it on Airbnb and immediately they saw an increase. That next year they had over $36,000 in rental income from the short term, stays in that property. So you add all that up together it really paints the picture of short term rentals really cash flowing a lot more versus a standard rental property. And we see that all the time. 

Airbnb Investing Generates 50% More Cash Flow Than The Stock Market

Wow. So yeah, you compare that to what the returns probably would've been if it was just in the stock market. Compare that to the S & P. They 50% increased the cash flow. If you compare that to a normal market return of say, 4%, 6%, 8%, it's gonna greatly exceed that. It's probably gonna be more than double that if you break down the numbers long term. So that's absolutely correct. 

So you're talking about that client's Airbnb, making a much higher cash flow, can they actually use that income or does it have to stay locked inside the IRA? 

When you own real estate inside of an IRA, that money's gonna, come back in. So the idea is that it's going to be part of your nest egg for retirement. Now once you hit the age of 59 and a half, you can totally take that money out and for any reason. It's just gonna be a normal distribution at that point.

If it's a traditional IRA, you would just pay your normal applicable tax bracket on those withdrawals. If it's a Roth IRA, again, completely tax free, no taxes whatsoever. So if you are below the age of 59 and a half, the only thing is that 10% early withdrawal penalty that would come into play. So I always try to tell people that if you really need to take that money out, then you are paying the extra 10%. But it is available for withdrawal if you need to.

How To Decide Beetween a Self-Directed IRA and a Checkbook IRA

You mentioned checkbook IRA a little earlier. What is the difference between just a self-directed IRA and that Checkbook IRA, and how should someone decide which kind of path is right for them? 

So checkbook IRA that's another category that's really increasing in popularity under our roof as well. The use case example for doing a checkbook versus a normal IRA, it really comes down to the property. So what I mean by that is if I own a rental property inside of my self directed IRA, and let's say I have some expenses that come up. I need to pay a contractor. I need to make a payment out of the IRA. You would reach out to the account manager to actually request that money to come out of the IRA to make that payment. So there is that back and forth. We have to request money to come out. We fill out a digital form, money goes out the door.

Versus with a checkbook IRA, the individual who has the property has direct hands-on control. So what we usually tell people is that if you have a number of renovations that need to be done. If you're expecting having to write checks out of that account on a regular basis, or if you're buying like a property at a sheriff's auction or a live auction where you need to have a check at that time to buy that property, that's when the checkbook IRA LLC, is gonna make the most sense.

If I buy a fixer and flipper property and I want to turn it into a long-term rental property or use it for Airbnb, I need to do a lot of rehab work on it in order to get it to that place. Then having a checkbook, LLC IRA setup is gonna give me that direct hands-on control to basically take that money out as I need to.  I'm just running through my own experience in operating Airbnbs, that there's a lot of checks that need to be written. It'd probably be a lot easier just to write those checks from the checkbook IRA versus bothering the account manager for each one of those expenses. 

You can submit for it online as well. But we see a lot of those folks go the checkbook route just for that particular reason. And it's really not complex to set up at all. It's quite easy. You're just basically setting up an LLC entity, and the IRA's gonna be listed as the owner member inside of the LLC. So once that's set up, we choose a bank account, we send the money over. Then you're pretty much off of the races at that point. 

Okay, so I'm basically operating a company - an LLC, within the IRA?

Yeah, so the IRA is gonna be considered the sole owner member of the LLC entity. Got it.

The Most Important Rules About Airbnbs Held in Your IRA

Are there any important rules that people need to know about who can stay in the property owned by the IRA? And where do people tend to get that wrong?

That's usually question number two when I'm talking to people is they read about what we call those prohibited transactions. So prohibited transactions are specifically listed in IRS code 4975. Basically it's just listing off the things that you can't do with real estate that you own inside of a retirement account. 

The main ones would be if I'm going to rent that property, I wouldn't be able to rent it to somebody that's in my direct lineal, family bloodline. What I mean by that is mom, dad, and then son, daughter,  or spouse. So basically I can't rent to those people. They can't receive any quote unquote personal benefit from that property since I'm the owner of that property. Now what I can do is I can rent it to a brother or sister is totally fine. Cousins, distant family members, that's all totally fine. and then of course it would also include yourself as well.

So if I own a property inside of my IRA, I can't vacation in that property. I can't have extended stays in that property, and then I also wouldn't be able to do any of the direct work myself as far as like doing any rehabs to that property.. but I can hire anybody else to do that work for me who are not in my direct family bloodline. 

All right. So if you can't vacation there and you can't work there, are there any other ways that you could stay there legally?

Yeah, so the IRS code is fairly vague on this. So if I have any sort of maintenance that's being done or there's a construction job that's happening, obviously, the owner is allowed to be there. So a lot of that really is up to specific interpretation, and we've heard many different interpretations of that over the years. But, just to keep it on the safe side, again, you would just want to not do vacations in that property, and not directly work on the property yourself and make any structural changes. 

Can Self-Directed IRA-Owned Airbnbs Be Managed By The Owner?

You had mentioned from a management perspective, do investors need to have a property management or a co-host when they're using the strategy, or can they be hands on managing the listing?  They can manage the property themselves. That's another common you can set that up on the Airbnb website. If it's on there, you can be in the driver's seat as far as choosing the tenant. And you can also choose a property manager as well if you want to go that direction.  

Exactly. I will just add to that though. If the individual owns the property in the IRA and they want to eventually vacation in that property. One exit that they could think about doing is they could distribute that property out of the IRA later on in life. So basically it would be distributed, but they would just pay taxes on that property and then they would have it retitled under their personal name and out of the IRA. That's totally doable we see a lot of people that do that.

That's a good point. Let's say you're trying to buy a place that would be your dream retirement home right at 59. And for a lot of us, 59 and a half is not that far away. It's not a never right? So you could buy something that you may end up taking it out of the retirement account at 59 without penalty, but in the meantime, you're letting your Airbnb guests pay your mortgage and put more money right into your IRA.

That's actually a great point, right? So let's say you wanted to retire in Hawaii. You could take those IRA funds, put down a deposit, buy the place in Hawaii, have guests pay your mortgage for the next five or 10 years. Appreciate the property and then take it out and move to Hawaii.

Tax Advantages of Airbnbs in Self-Directed IRAs

tax advantages to owning an Airbnb inside the self-directed IRA that make this strategy especially compelling?

 If we look at the long-term ownership of real estate inside of an IRA or an IRA LLC just the fact that you have the rental income coming in on a monthly basis, and then you have that final sale, that property also. So all that's flowing back into the IRA and it's not gonna be subject to the capital gains taxes and personal taxes until eventually you pull it out later on. So it generally does save a lot in taxes in the long term.

Yeah, and that's a further compounding, right? Because you're not paying the taxes on it. That's awesome.

All right, to wrap this up, what is your number one piece of advice for someone listening right now who wants financial freedom through Airbnb investing, but just feels overwhelmed by the idea of setting up this self directed IRA? 

I would say it's not as hard as it seems. It's really quite easy to get that process in motion. It's becoming more and more popular every year. It's something that a lot of people are starting to do a lot more of versus just owning it in their personal name or their own personal LLC. So I definitely say it's always good to get everything in motion and not just wait and think about it forever. So if you want to do it, might as well start exploring and then move forward if it makes sense.

The Timeline For Buying An Airbnb Through Your IRA

I realize everyone's different. But for example, if you're a person who is looking at a potential property right now, how fast, like ballpark, how long would it take to set up the self-directed IRA to be able to purchase it and begin letting that cash flow into their IRA? 

There's a couple of things in play there. You'd have a transfer or a rollover that would occur to fund the IRA to come in the door. Just to break that out. If you start the application for the self-directed IRA, we generally get that open within one business day. So the account's then open. We're then gonna put the transfer or the rollover in motion. So for people who might not know that terminology, a transfer means I'm transferring from one IRA to another IRA. So I'm just doing a direct transfer. A rollover means if I have a previous employer plan, like a 401k, 403B, then that's gonna be a direct rollover to an IRA. For most, IRA to IRA transfers.

We generally say it's gonna be anywhere from about four to seven business days, for most companies to fund the account, so them sending the money back to Advanta. And then, rollovers generally take a little bit longer we say one to two weeks. It really depends on the provider. And how fast they're gonna process that and send it over.

So basically, you could have everything up and running within about two weeks. All set, ready to go. If you decide to go the checkbook LLC route, that does take a little bit longer too, with just like the state filing and registering for the EIN number. So you might want to give yourself about three weeks total in that scenario, two to three weeks basically would be the general term that you would think about.

That's way faster than getting a traditional loan. That's a great point. Alright. Oh, and this has been great. How can our listeners get in touch with you to explore if this option's a right fit for them? 

owen@advantaira.com You can also give me a call in the office here. My direct line is (727) 221-0095 want to walk through a certain scenario, I'm happy to break out the numbers with you.

That's awesome. Give them a call and tell them that the Tates sent you. Thanks Owen.  Thank you guys.

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!