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Real Estate Due Diligence: What Type of Investor are You?


  |  By Chris Shanahan, CISP®

Using a self-directed IRA to buy a single family rental home has the potential to be a rewarding retirement investment strategy, where you can grow your nest egg through monthly rental income and capital appreciation. However, before buying a property, it's crucial to conduct ample due diligence.

Given that many of our clients have questions about the real estate due diligence process, PENSCO recently hosted a webcast with Abhi Golhar[1], a real estate investor and host of Real Estate Deal Talk radio. Abhi helps manage investment projects in Atlanta, Charlotte, St. Louis and Dallas, and one of his areas of focus is buying single family homes, renovating them and renting them out.

During the webinar, Abhi discussed how to perform due diligence on single family rental homes to determine if a property you are considering aligns with your risk tolerance and cash flow generation needs.

As Abhi emphasized, rental properties come in all shapes, sizes and conditions. Before buying a single family home to rent as an investment, he recommends being realistic about the size and type of project you are comfortable tackling.

One way to start the due diligence process is by determining which of these three types of real estate investors best describes you:

1. Renovation-to-renter investor: A renovation-to-renter investor is typically not a first-time real estate investor. Rather, this type of investor has likely purchased real estate before, either within an IRA or using taxable dollars. These renovation-to-renter projects can involve a great deal of risk because an investor is often purchasing a house that is in poor condition and requires a substantial amount of renovation before it is rent-ready. These projects can also involve unforeseen complications -- such as uncovering a black mold problem during renovation -- that require additional time and money to fix.

But these projects can be rewarding for investors who are comfortable hiring a construction firm to oversee a large-scale renovation. For instance, converting an existing 2 bedroom/1 bathroom house into a 3 bedroom/2 bathroom house can make the house more attractive to renters and boost monthly rent, resulting in the cash flow necessary to cover the renovation budget.

2. Minimal upgrade investor: This type of investor may have invested in real estate before, and is somewhat familiar with the ins and outs of owning a single family home. However, this investor could also be new to the real estate game.

A minimal upgrade investor is typically comfortable buying a property that needs minor renovations or updates, such as a fresh coat of paint, new lighting or refinished cabinets. But this is not the type of investor who would be comfortable buying a single family house that requires a reconfigured a floor plan or a down-to-the-studs renovation.

3. Turnkey investor: A turnkey investor is often new to buying single family homes to rent. Rather than purchasing a property that requires hefty renovations, a turnkey investor is seeking an investment property that could either accommodate renters immediately or is already tenant occupied.

This investor will very often work with a real estate agent who has a list of homes for sale that are updated and ready for rent. Or, these real estate professionals can help a turnkey investor find property owners who own a tenant-occupied single-family homes, but may be looking to sell the property.

Buying a turnkey property is certainly not risk-free, but it can be a good first step to becoming familiar with the process of investing in single family rental homes with your self-directed IRA.

The Nuances of Real Estate Investing with a Self-Directed IRA

As part of the due diligence process, it is very important for you to understand the nuances involved when buying real estate with your self-directed IRA vs. buying a single-family home with taxable dollars.

For instance, as the IRA owner, you are prohibited from performing any “sweat equity” on the property. When investing in real estate with your IRA, the IRA owns the property— not you. That means rules and regulations prevent you (or any other disqualified person) from personally performing any work on the property, like mowing the lawn or changing a light bulb.

IRA owners are required to have a third party, such as a property manager, perform any tasks related to upkeep of the property, including making all repairs and upgrades. This is crucial to remember as you decide which type of real estate investor you are— if you consider yourself to be a minimal upgrade investor, you cannot perform those minimal upgrades yourself. (To understand the do's and don'ts of buying real estate with your IRA, read this blog.)

To get more of Abhi's tips for conducting real estate due diligence— including how to determine if the rent you can charge will provide adequate cash flow to cover the cost of buying and maintaining a property -- you can watch the full webinar on conducting single-family rental home due diligence:

[1] * Abhi Golhar is not affiliated with PENSCO Trust Company, its parent, Opus Bank or any other affiliates. Abhi Golhar was not paid for his participation in the webinar.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.