This is normally common knowledge among investors: Investment involves tradeoffs and risks, and sometimes the risk of loss for any particular asset class or investment or security is substantial. That’s why Self-Directed IRA investors should do as much due diligence as their abilities, background, education and financial acumen allow.
The Federal government, of course, recognizes that most Americans are not terribly sophisticated investors. These investors may reasonably delegate some or all of their due diligence to various kinds of licensed financial advisors. The federal government also closely regulates the promotion, buying and selling of securities, in order to protect the average investor who has little in the way of financial education. There’s a price to be paid for this regulation, however – ultimately in the form of lower returns for the good investments, which must bear the costs of regulatory compliance and filing.
This is fine for the average investor. But those who are attracted to alternate asset classes frequently find themselves in industries and sectors that are not nearly as closely regulated as are publicly-traded stocks, bonds, mutual funds and other types of securities.
This is the realm of the Self-Directed IRA: The investment possibilities are nearly infinite, but with less regulation, you must engage in that much more due diligence before investing. When it comes to Self-Directed IRA investing, you are in the drivers’ seat – not advisors, generally.
This doesn’t mean that there aren’t great advisors working with our clients on non-traditional investments in their accounts. We work with fantastic experts on gold and silver, real estate, non-traded REITs, private placements and debt, convertible securities, private lending and many other asset classes all the time. But self-directed strategies generally do require some expertise on the part of the investor above and beyond that generally found among the general population.
What is due diligence? In the investment world, due diligence is a disciplined and thorough process by which an investor verifies all material facts prior to making an investment. For example, in a real estate transaction, due diligence would involve the following:
- Verifying and inspecting the property exists and is in the condition described by the seller.
- The title is clear, or any liens or encumbrances have been accounted for in the purchase price.
- The property is livable or usable, or can be made so with an amount of additional investment that can be estimated with reasonable certainty.
- The actual rental income is as promised, or the buyer has assurance similar properties in the neighborhood generate the level of rent assumed.
- Any neighborhood issues that could affect the value of the investment, positively or negatively, have been identified and ‘baked in’ to the purchase price.
- Neighbors won’t cause major problems.
- The property is insurable.
- The property is eligible for financing, if required.
Each of these requires an effort on the part of the buyer or his or her representative. The realtor won’t necessarily do it for you. The realtor’s interest is to get the home sold as quickly as possible for as high a price as practicable. This is not what’s in the buyers’ interest, and so it’s up to the buyer to conduct the investigation, or have a trusted representative, advisor or attorney do so on his or her behalf.
[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#SelfDirectedIRA”]Investment risks-Self-Directed IRA investors perform due diligence[/tweetthis]
In private lending, an investor may conduct a similar process, verifying any problems with a property or other asset acting as collateral. The private lender will also conduct due diligence and verify the borrower’s income, past credit or criminal history, or any history of fraudulent activity.
The idea behind due diligence is to prevent anything going wrong and derailing the investment that could have reasonably been identified prior to purchase. That is, to avoid bad surprises.
This doesn’t mean risk goes away – sometimes there are events that occur that are beyond any individual’s ability to predict. But due diligence may well help you from getting blindsided by an event that a more careful investor could have foreseen and discounted when making an investment or price decision.
American IRA, LLC is a leading provider of third-party administrative services for owners of Self-Directed IRAs. We are positioned to be an outstanding option for those investors who are capable of doing their own due diligence, or who already have trusted advisors to help them, and who want to keep fees and expenses down and keep their accounts working as efficiently for them as possible. For additional information, call American IRA, LLC at 866-7500-IRA (472), or visit our website and extensive library of information at www.americanira.com. We look forward to working with you.
Images by: presentermedia.com