How to Avoid the Most Common Mistakes as First-Time Landlords
Using your self-directed IRA or Solo 401(k) capital to invest in real estate can be a great way to secure your retirement future. You get to control your own retirement funds, choose your own investment properties, and avoid all the hassle of submitting paperwork and waiting for administrators to process each transaction.
However, the degree to which your strategy succeeds depends on a number of factors. Some of these factors are out of your control, such as capricious housing markets or natural disasters, but those are outliers that are not likely to have much day-to-day impact on your investments. The most crucial factor contributing to the profitability of your real estate portfolio is what you do to maintain your investment properties.
Many new real estate investors are captivated by the potential profits, but neglect the core principals of effectively managing real-estate investments. The profitability of your investment hinges on following best practices and with the right approach, your chances of success are much higher. Since you should always begin as you mean to go on, it is important to start your investments on the right foot. With that in view, let’s begin by examining the most common pitfalls for first-time landlords and how to avoid them.
Pitfall: I Treat My Property Investment Like a Hobby
Remedy: Treat it Like a Business
Buying a house and fixing it up can be an enjoyable pursuit, but when you use your hard-earned retirement capital to invest in rental property, you are not doing it for fun, you are working to secure your financial future. A real estate investment is a business that must turn a profit and if you neglect to treat it as such, you could wind up losing a lot of money. This means doing your research, hiring professionals where you need them, keeping your accounts in order, staying on top of your taxes, and knowing your rights and obligations as a landlord. If you take your investment seriously, it can be a rewarding and profitable part of your retirement plan.
Pitfall: I’m Overwhelmed by Expenses
Remedy: Prepare Exhaustive Estimates
The most common mistake new real-estate investors make is failing to find out what recurring expenses and potential unexpected expenses they should work into their cash-flow plan. Underestimating regular maintenance expenses can be a costly mistake, and if you are not prepared, the costs for unexpected repairs can devastate your ROI. Fortunately, you can avoid this future pitfall with a little extra legwork now. Have the property thoroughly inspected, consult professionals or others with experience maintaining properties, and research all the costs. Then, use that information to make detailed estimates of your potential expenses and be sure to account for them when you are assessing your cash-flow needs.
Pitfall: My Vacant Property is Eating up My Capital
Remedy: Structure Your Cash-Flow to Cope with Vacancies
Having your investment plan upset by an unanticipated period of vacancy in your property can be distressing emotionally and financially. However, this is another pitfall that can be avoided by doing some financial due-diligence at the outset. A simple cash-flow analysis can help you form a realistic picture of your financial situation and ensure that you will have sufficient funds to sustain the property if you are lacking tenants for a time. This will also help you maximize the returns on your investment and avoid serious financial hazards like foreclosure.
Pitfall: I Finally Found Tenants, but Now They Can’t Pay the Rent
Remedy: Properly Screen Potential Tenants
Neglecting to properly screen tenants is a surprisingly common pitfall for first-time landlords. It’s true that you want to get tenants into your property as soon as possible so that it can start generating income. Many new investors think that they will save time and money by skipping the full background-check process, but proper screening is one of the most important things a landlord can do. Ensuring that you have reliable, financially stable tenants is absolutely essential to the success of your property investment, so don’t sabotage your retirement future by skimping on this step to save a few dollars in the short term.
Pitfall: I’m in Some Legal Hot Water Over My Property’s Hot Water
Remedy: Get Familiar with Laws and Local Housing Codes
Failing to understand basic rental laws and housing codes can get you into some serious difficulties. Remember, a rental agreement is a legal contract and as a landlord, you will be responsible for ensuring that your property and procedures comply with applicable laws, as well as a number of state and local health and safety standards. If you don’t, your tenants may be within their legal rights to break the lease agreement or even sue you for neglect. Since landlord-tenant laws vary in each state and city, it’s crucial to fully educate yourself regarding local statutes. It’s also important that your lease agreements and other forms comply with the laws in your area, so don’t use generic forms. This isn’t as daunting a task as it may seem, however. You can consult with a landlord-tenant attorney, and you can get a lot of the information you need from local or state landlords’ associations. Remember, the law is there to protect you and your investment property, so make sure you stay on the right side.
Pitfall: My Tenants Don’t Complain, so Everything Must be Fine
Remedy: Don’t Neglect Your Tenants
A common mistake we all make is assuming that if no one complains, nothing is wrong. But for landlords, this can be an expensive assumption. Once you have tenants in your rental, it’s important that you continue to pay attention to the condition of the property. They might not always tell you when something isn’t working well or needs repair, so make sure your property manager keeps up with periodic maintenance and inspections. This isn’t just necessary to the happiness of your tenants, it’s also the best way to ensure that you don’t incur those pesky unexpected repair costs that can be prevented by regular upkeep.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
