Ever had a great deal right in front of you, but been painfully unable to act because you were short on capital? If so, then you likely understand why so many real estate investors opt to take their traditional individual retirement accounts (IRAs) and make them self-directed IRAs. Real estate investors benefit from being able to access their retirement capital in order to implement their investment strategies of choice.

While a traditional IRA generally holds “traditional” investments like stocks, bonds, and mutual funds, self-directed IRAs allow investors to hold alternative assets, such as real estate, mortgage notes, movie projects, farm animals, private equity, and just about anything else with very few exceptions. Self-directed 401(k)s can do this as well. There are more than $25.4 trillion held in retirement accounts in the United States today. It should be no surprise that real estate investors are more likely than most to transition from a traditional IRA format to a self-directed one in order to better access and manage their retirement savings and capital.

While the move from a conventional IRA to a self-directed one represents a highly advantageous decision for most real estate investors, your ability to invest using the best strategies may be compromised if you select the wrong account administrator for your self-directed IRA. While not all administrators are right for all account holders, you can get a pretty clear idea about whether or not an administrator will be able to work with you to further your real estate investing goals by starting with these three questions:

No. 1 Do you handle a lot of real estate transactions for other clients?

While just about any self-directed IRA administrator can technically allow you to invest how you like in almost anything you like, not all are equipped to deal with the specific needs of real estate investors. If the administrator does not understand that “real estate” can encompass everything from development to private mortgage notes to single-family rentals to apartment complexes to flipping, then they may be tempted to tell you that they specialize in real estate but not actually be prepared to help you with your specific strategy. Make sure that your real estate investing plans will work with your administrator’s abilities by finding out what kinds of real estate investments they have handled for other clients in the past.

No. 2 How quickly can you react to expense requests?

All of your real estate investing expenses must come out of your self-directed IRA in order for you to be compliant with IRS regulations. As you know, real estate often moves quickly. Find out the company’s policy for payments. Some companies reserve the right to wait 15, 30, or even 60 days! Real estate investors need much faster reaction times – often same-day. Many custodians do not have the mechanisms in place to get IRA-related expenses paid quickly. If your custodian does not, then you will end up seeing a lot of deals disappear before you can do them or facing other issues revolving around delinquent payments. Make sure that your custodian can accommodate your timeline and has that ability stated in their policies.

No. 3 How do you structure your fees?

A self-directed IRA administrator may charge a variety of fees for setting up and managing your account. Expect to pay a set-up fee, a maintenance fee, and likely a per-transaction fee that will be assessed whenever you buy or sell an asset. Some administrators offer a flat annual rate that covers everything. If you only plan to do a couple transactions a year, you may be better served by a plan that lets you pay per-transaction, whereas if you do many deals over the course of a year, a flat-fee structure may be a better option. If an administrator offers multiple types of fee structures, ask them if you can switch back and forth depending on your plans for the coming quarter or year. Most real estate investors will be best served by selecting an administrator who offers some flexibility in this area because your strategies change as your markets do.

Self-directed IRAs are among the most useful retirement accounts out there for real estate investors, but all their utility and advantages can be demolished in an instant if you select the wrong administrator for your account. Don’t be afraid to interview multiple custodians before selecting the one that is right for you, and do not be embarrassed to ask to see any responses from a custodian in writing. At the end of the day, although it’s your money in that account, it is the custodian who holds the keys to the gate. Their goals and yours must mesh in order for you to have a successful and profitable self-directed investing experience.

  • Mike Ventry

    Mike Ventry is a self-directed IRA administrator with Advanta IRA. He may be reached at mventry@advantaira.com.

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