Entering the self-directed world can be very exciting to some and very scary for others. For the excited clients, they finally get to spread their wings and take on the alternative investment world. For the clients who are trepid but know they don’t want to stay in the conventional investment world we want to help by giving some advice about what “due diligence” is all about.
Whether you are the excited or trepid, due diligence is of the utmost importance. Unless you are a professional experienced investor, you are best served by creating a TEAM. You can think of this team as your due diligence
So who should be on your team?
You of course as the owner of the self directed plan. IRA’s require a custodian so it is important if you are choosing a self directed IRA to use a “passive” or “alternative custodian”. Self directed 401 k’s do not require a custodian. Our self-directed 401 k clients are the “Trustee” of their plans. As such they make all the investment decisions. For our self directed IRA clients, we create underlying LLC’s (they become the investment arms of the IRA) and our clients are the managers of the LLC’s. So in either case, our clients are the ones in charge.
As manger of the LLC or Trustee of the 401 k plan you play a central role. It is up to you to investigate and gather information. If you are thinking about a private placement (ppm) or limited partnership, find out how long they have been in this business, their success rate etc. Remember you are self directing into a private enterprise.
Most of our self directed clients want to invest directly or indirectly in real estate. This can be raw land, commercial, fix and flips, long-term rentals etc.
CPA or Tax Professional: You should always consult a CPA or tax professional who can provide tax implications and advice on IRS rules. Don’t be surprised however if the CPA or tax professional you choose does not know much about the self directed world. A lot don’t, not to blame them, they just haven’t come across them before so it is important to quiz the professional about their experience.
An Attorney: You should ask your attorney to review the documents you intend to sign on behalf of the self-directed plan. Once again, ask their experience concerning self directed investments.
Real Estate Agent and Title Company: You should seek out an experienced real estate agent – from personal experience, you make your profit when you purchase the investment, not when you sell it. Proper Title Insurance is important – you don’t want to wake up and find a long hidden lien.
Using a qualified alternative investment due diligence team will help to ensure you are making a wise investment, which will help you achieve your retirement goals. As a personal aside, I introduce my team members to each other and encourage them to discuss my situation between themselves.