A Millennial’s Guide to Real Estate in a SDIRA

Navigating Self-Directed IRAs in Today’s Real Estate Market: A Millennial’s Guide

In today’s rollercoaster real estate market, investing with a Self-Directed IRA (SDIRA) can be a game-changer. But let’s be real—this isn’t just a “set it and forget it” situation. The key to long-term success is not just doing your homework upfront but staying on top of your investments consistently.

The Two Sides of Due Diligence

Investing through an SDIRA means your job doesn’t end once you’ve snagged that rental or property. You’ve got to keep tabs on everything to make sure it’s making money and staying in compliance. So, let’s break down the two stages of due diligence: what you need to do before and after you invest.

Pre-Investment Due Diligence: The Prep Work

Before you jump into an SDIRA investment, here’s your to-do list:

1. Research the Market

Don’t just follow the hype—look at real numbers. Study property values, rental demand, population growth, and job trends in the area.

2. Evaluate the Property

Get a professional inspection, review maintenance records, and have an appraiser tell you what the property is actually worth.

3. Analyze the Financials

Look at the property’s past income and expenses. Run the numbers—calculate your ROI and projected cash flow to see if it makes sense.

4. Check Zoning and Legal Stuff

Make sure the property follows local zoning laws and doesn’t have any legal drama like code violations or ongoing disputes.

5. Verify Ownership

Do a title search and get title insurance. You want to avoid any future surprises over who really owns the property.

6. Scope Out the Neighborhood

Check out the area at different times of the day, and dig into local crime rates, school ratings, and amenities.

7. Understand the Leases (For Rentals)

Make sure tenant leases are up to date, rent payments are solid, and rates are in line with the local market.

8. Explore Financing Options

Decide if you’re going traditional or using a non-recourse loan, which is essential for IRA investments.

9. Look for Value-Add Opportunities

Think about how you can increase the property’s value—maybe a renovation or some operational upgrades.

10. Consult the Pros

Bring in a real estate attorney and tax advisor to review contracts and make sure you’re good on tax implications.

11. Run Background Checks

Do your due diligence on sellers and partners to ensure they have a solid reputation.

12. Plan Your Exit

Map out your strategy for eventually selling the property when you get close to retirement age. Or plan to keep the property in your account to pass down to the beneficiaries of your account. Remember once you reach the age of 73, the IRS requires you to take “RMDs”. Required minimum distributions. Your account will need enough cash to cover these.

Ongoing Due Diligence: Stay on Top of Your Investment

Congrats, you’ve bought the property! But now comes the ongoing work:

- Keep an eye on your SDIRA account statements.

- Regularly review the property’s performance and check that it’s hitting your investment goals.

- Stay on top of IRS and SDIRA regulations so you don’t end up with penalties.

Budgeting and Building Your Portfolio

Investing through an SDIRA takes some upfront cash for research and management. Start small—maybe locally—then look at expanding into other regions. Don’t forget to lean on your network and tap into resources like the BiggerPockets community for advice and tips.

Staying Compliant

Compliance is a big deal with SDIRAs. Avoid prohibited transactions, like using the property for personal stuff or managing it yourself. Always use a third-party custodian to stay in the IRS’s good books.

Final Thoughts

Investing in real estate through a Self-Directed IRA can set you up for financial freedom, but only if you’re willing to put in the work. By handling both front-end and ongoing due diligence, staying compliant, and using trusted resources, you can maximize your returns and secure a bright financial future.