How to Do Your Real Estate Due Diligence in a Real Estate IRA
A Self-Directed Real Estate IRA, or a Self-Directed IRA in which an investor keeps real estate, requires a more active approach to investing. It’s not a collection of mutual funds hand-selected for your benefit. Instead, a Self-Directed IRA means you’re on your own for choosing your own investments.
What does that mean for Self-Directed IRA investors? More freedom and more opportunity to utilize their experience with real estate. But if you are just breaking into this world, it helps to know how to do your “due diligence” before selecting an investment:
Step One: Research Your Market
There’s an old saying in real estate: location, location, location! That’s why your research should start with a market analysis. Even if you were to buy a subpar property, a market that’s on the upswing could potentially boost its value due to location alone. Here are some of the variables to consider as you research a real estate market:
- What are the demographics of the local community or city, and where are they headed? This can include variables like job demand, a low median age (suggesting an up-and-coming population looking for real estate), and the general tone of the market—such as whether it’s considered a buyer’s market or a seller’s market.
- Real estate value. What is the average rental income in the location? Average CoC return? In the neighborhood you are considering, what is the average price per square foot, and how does that reflect on the property you might be considering?
- When zooming down to an individual neighborhood, keep in mind that many people purchase real estate simply due to its access—usually, this means access to schools. Or a location with high-quality properties near a budding job center would mean access to fast commuting, which is another huge motivator for buyers.
Step Two: Know the Property
Once you have dialed in to a location and you have identified a property that seems undervalued relative to the prospects of the location, you are ready to take a closer look at the property itself.
- Visit the property personally. Pictures online will always show the property in its most flattering light. To identify key issues—such as hearing a train on nearby tracks—visiting the property in person is the only way to do it.
- Learn about the property construction. When was the property built? If it’s older, what about issues like the foundation? The roof? Knowing more about how the property was constructed will give you a hint as to the future expenses you might expect to incur. Keep in mind that over a third of homeowners list maintenance and repair needs as their biggest purchase regrets.
- Look at the context. Where does the property fit in the neighborhood? What does it look like from the curb—its “curb appeal”? Does it look like a property that might attract renters, or will it need cosmetic updates and further investment first? And look at how the house fits into the neighborhood. Is there much space?
Step Three: Know Your Options
Once you have looked at enough properties, you will probably get a sense of which one might work best for you. It’s now time to investigate your options. With a Self-Directed Real Estate IRA, you can use non-recourse loans to get funding within a retirement account to make the purchase. As you map out your options, you will want to have a sense of what other people in the area charge for rent on similar properties. You will also want to estimate your IRA’s own expenses—including property management. This will give you a sense of the cash flow you might expect if you can find an occupant.
Finding Real Estate is less of a science than an art, but a Self-Directed Real Estate IRA can help you maximize a piece of real estate’s potential. Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at www.AmericanIRA.com.