Investing in Vacation Property through Your Self-Directed IRA?
Published on July 30, 2015
Don’t Forget to Factor in the Maintenance Costs!
Summer vacations mean going to the beach or up to the mountains for many people, and renting a condo or a house is a popular option over staying in a hotel. There’s a chance that the property you’re renting for your vacation is someone else’s real estate investment … one that could be made through a self-directed IRA.
Purchasing a rental vacation property through your self-directed retirement plan is a bit different and comes with its own set of rules (see our page about real estate IRAs for the ins and outs of these transactions). However, vacation homes as investments (to be used by others) can be a great way to build up your retirement assets.
Real estate is the most popular investment class to include in a self-directed retirement plan. In 2014, 1.02 million homes of all kinds were purchased as investments, according to the National Association of Realtors. Purchasing a second home is a popular investment (and lifestyle) strategy and has been on the rise in recent years.
- The National Association of Realtors’ 2012 Investment and Vacation Home Buyers Survey revealed that the sale of vacation homes in 2011 rose 7% in that year compared to 2010 (buyers purchased 502,000 vacation homes in 2011).
- Annual vacation home sales in 2013 jumped nearly 30% to 717,000 homes, with vacation home sales representing 13% of the total real estate market (their highest share since 2006).
- NAR’s 2015 survey shows that 2014 vacation-home sales soared to an estimated 1.13 million last year, the highest amount since NAR began the survey in 2003. Vacation sales were up 57.4 percent over 2013 figures.
Many of these investments are vacation rental properties meant to provide an income stream over the years to account holders. When made as a self-directed investment, these properties may not be used by the account holder and certain other individuals (disqualified individuals) and are meant to be rental income producers to build up retirement savings.
However, that real estate investment is not all about the income it can produce. Since all income and expenses related to an asset must flow through the self-directed retirement account, investors are wise to do their homework and research the associated maintenance costs of that real estate.
If your investment is a condo, find out what the ongoing maintenance fees are for landscape maintenance, garbage pickup, repairs and other common area charges. If your second-home investment is not a condominium (such as a lakefront cabin or mountain retreat), you’ll need to set aside funds within the IRA to cover expenses such as hiring gardeners, painters, electricians, plumbers, and handymen. Depending on where the property is located, you will have to pay for snow removal. Other costs to consider are a security system (and central monitoring), the services of a property manager, and cleanup or remediation if the property is in a flood zone.
Don’t forget the homeowners insurance on the investment property, or flood or hurricane insurance if that is necessary.
The self-directed IRA will pay all the associated real estate taxes on the investment property so make sure that the rental income it produces covers this expense, or that you have adequately funded the retirement account.
Enjoy tax-advantaged retirement savings
Thinking about investing in rental property through your self-directed IRA? There’s still time to get in on the summer vacation period—or think ahead to ski season up north or a sunbird haven in the south. Investing in vacation property within your self-directed IRA enables you to earn tax-free or tax-deferred income within your retirement plan, depending on whether you have a Traditional or Roth IRA.
Either way, these self-directed retirement plans have all the same tax advantages of their regular counterparts … and a much broader array of allowable investments to choose from (like real estate).