Real estate is the #1 investment in self-directed IRAs. Income property—from apartment buildings to commercial properties to undeveloped land—offers the potential for good return on your investment over time. It’s also an asset many people feel comfortable with from their experience as homeowners or in business.
Whether you’re just getting started in real estate investing, or are an experienced investor, don’t get too comfortable. It’s important to know what you’re getting into before making that investment. Be sure to avoid these four blunders in choosing an asset for your real estate IRA:
- Neglecting a thorough inspection of the property.
Before you make an offer, inspect the property—bringing along a trusted, knowledgeable expert to help, such as a realtor or contractor. Together, look for damage that may need to be repaired. You may also want to ask about warranties that can protect you from some of the pricier repairs, such as appliances, electrical, and plumbing.
- Forgetting to calculate the annual vacancy rate on a rental property.
Find out if any units in an apartment building, a storefront, or office space in a commercial building have a history of long-term vacancies. When rental properties aren’t bringing in rent, ongoing expenses can siphon value out of your real estate IRA. Establishing a relationship with an experienced leasing firm in the area can help provide valuable insight on what renters are looking for and are willing to pay and can also provide the needed exposure for your rental property.
- Not factoring in the cost of a property manager.
Your role in managing the property is limited by law. Therefore, if you need a property manager, you’ll have to hire one. Remember, the cost will be paid from the IRA. Make sure to include these expenses when determining cash flow of a property.
- Failing to buy all necessary insurance.
Find out early what kind of insurance the IRA may need to carry on the property: title, earthquake, flood, or fire, for example. Then, make sure the insurance company you choose will issue the policy in the name of your IRA.
Acting solely as an administrator for your IRA, The Entrust Group does not provide advice regarding your investment strategies or the asset itself. Talking to an investment expert, such as a real estate broker, can help you make the best decisions regarding your investment. With their assistance, you can properly conduct your due diligence on an investment. Their advice can make a huge difference. You can learn more about these and other aspects of due diligence—the process of researching an investment—when you download our free report, What Due Diligence Is, Why It Matters, and How to Do It Well.