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Founder/CEO of Next Generation Trust Company, a trust company specializing in custodial & administrative services for Self-Directed IRAs.

Vacation rentals are hot commodities in the real estate investment domain — and the same goes for including these assets within a self-directed individual retirement account (IRA). Real estate in general is the most popular asset class among self-directed investors, in my experience, and with summer coming fast and the world opening up, it may be a good time to think about including vacation rentals as a long-term, income-producing investment within a self-directed retirement portfolio.

Build A Strong Investment Foundation With Research And Due Diligence

Really understanding the local real estate market and its popularity as a vacation spot — whether a remote mountain location, ski resort or beach town with shopping, dining and amusements — will help you determine rental prices when you’re ready to list it as available. Therefore, as with all self-directed investments, the IRA account owner is expected to carefully research the asset and location before sending investment instructions to the plan administrator. Bear in mind that unlike other types of real estate investments, a vacation rental property is likely to have seasonality attached to that income stream.

Other factors can also affect its value as an income producer. Research could include gathering intel on local attractions and nearby sites of interest, as well as length of the renting season; these factors can drive rental prices higher and ensure a steady stream of interested parties in certain markets. If the property is in a high-demand, competitive area, consider maximizing your investment return by investing in an amenity-rich property or making renovations or upgrades for steady, long-term income.

Steps To Invest In Real Estate/Vacation Property Through A Self-Directed IRA

1. The first step is to select a self-directed retirement plan custodian/administrator and complete the paperwork to open a new account. You’ll have the choice of funding the account via a rollover, transfer or contribution of personal funds (or a combination of these).


2. Once all the necessary forms are completed and reviewed by the administrator and there are cleared funds in the account, you are ready to make an investment. For real estate investments, you will first submit what’s called a buy direction letter; this is for buying an asset through the IRA and has instructions for the custodian/administrator about where and how to execute the transaction on behalf of your IRA.

3. Submit supporting documentation to the custodian/administrator, such as the real estate contract and/or purchase documents. Documentation must be in the name of the IRA (not the account holder’s personal name), and the custodian will sign on behalf of the IRA.

4. The plan administrator will then conduct an administrative review of all internal and supporting documentation, and send the funds out as directed by the account holder. After the closing, the recorded deed must be sent to and held by the custodian/administrator.

Factoring In Expenses

As with all self-directed investments, the income and expenses related to the asset flow through the IRA. Therefore, in addition to upgrades you’ll be making, be aware of any off-season expenses (if relevant to the property) so you can plan ahead to further fund the IRA.

Expenses related to vacation rentals may include:

• Mortgage, state and local taxes.

• Homeowners insurance and, if applicable, flood insurance.

• Utilities.

• HOA fees if in a condominium complex.

• Cleaning services between rental periods, deep cleaning services when shutting down for the season.

• General upkeep and minor repairs, such as painting and light carpentry, handyman services.

• Property management.

• Advertising and showing the property: maintaining a property website, paying for inclusion on booking websites, or paying for real estate listings/real estate agent.

Another thing to be aware of is avoiding any prohibited transactions, especially those involving a disqualified individual or entity — parties that are prohibited from engaging in the sale, leasing or exchange of the property, providing goods or services for the investment, and living in or renting the property. Doing so violates IRS guidelines and puts your self-directed IRA’s tax-advantaged status at risk.

Specific examples of disqualified persons are the IRA account holder, the account holder’s spouse, ascendants or descendants (up to/down to great-grandparents and great-grandchildren) and their spouses; fiduciaries and service providers of the self-directed IRA (such as one’s financial planner, CPA or the IRA custodian). Therefore, the handyman, servicers or occupants of the property cannot be any of the individuals listed above.

Including real estate in a self-directed retirement plan has many potential benefits for investors who are seeking ways to hedge against stock market volatility and build retirement wealth through alternative assets. Vacation rental homes in the right areas can be a powerful way to diversify your retirement portfolio and generate passive income for many years.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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