Real Estate Due Diligence
When considering real estate as an investment for your self-directed IRA LLC or Solo 401(k) plan, proper due diligence is key to achieving solid returns. The concept sounds simple and obvious, but is often overlooked or executed without proper thoroughness. One of the underlying reasons successful investors attain financial reward is by sticking to this principal. Conversely, a primary driver of failed real estate deals is a “ready, fire, aim” approach that does not fully consider the risks that may come with a specific property.
There are many ways one can evaluate a property to try and identify if it will be a successful investment, and the particular approach will vary based on the location, age and initial condition of the property. We’ve outlined a few of the main areas where you should focus your energies as a means of pointing you in the right direction.
Start with the Numbers
Before you even start looking under the hood, so to speak, you need to be sure the numbers on a property work. You do not necessarily have to have every potential cost figured out to the penny, but a rough analysis of purchase costs, potential repairs needed in the immediate and mid-term, taxes and insurance, borrowing costs if a non-recourse loan will be used on the expense side, and the property value and approximate monthly rent on the income side will help you determine if this property is even worth taking a more detailed look. If the numbers look good initially, then a more specific analysis is in order.
If the property has been operated as a rental in the past, audited books or tax returns from the prior owner are the best means of seeing what the operating costs and profit of the property have been. There are also several online tools available to help gauge current rent rates in a neighborhood. Your real estate agent can likely help you in this area.
Property Condition
Evaluating the current condition of a property and the expected costs you can expect to operate and maintain that property is a critical component of your more detailed analysis of a property that looks interesting on the surface. The level of examination required will vary greatly, however, depending on the age and history of the property.
How you acquire a property will also have an impact on your ability to truly evaluate property condition. When purchasing through normal market channels such as a Realtor, you should have the time and contractual space to perform various property inspections. In a foreclosure auction or bank REO acquisition, your ability to have professionals evaluate the property may be limited. As such, you will want to ensure that you only pursue properties with limited ability to inspect if you are very experienced in the market or have someone on your team such as a contractor who is.
When you have time for inspections, consider the various types of systems and whether they need a basic or more thorough evaluation based on age. The requirements for a newer house in a subdivision of similar age homes will be less than those for an older property or a property in a neighborhood where there is a wide variety of ages and conditions. A good whole-home inspection will be sufficient for a more recently built home, or even a 20-year-old home in a large subdivision where an inspector will know the types of issues common to that neighborhood or even a certain builder.
As you work with older or more unique properties, additional inspections such as sewer, radon, lead paint, etc. may become necessary.
Environmental Risks
While you, of course, will want to obtain adequate insurance coverage for your property, knowing the types of risks common to the location will help you greatly. If a neighborhood is prone to flooding, earthquakes, etc., you will want to know, and be sure to have a policy that provides specialty coverage for these types of events. If you are looking at several houses in an area, and some are at higher risk than others, then leaning towards the lower risk properties will be in your favor.
You can speak with your commercial insurance agent about the history of a neighborhood. You can even have them run a CLUE report on the property to see if there is a history of claims. Not only will such a history affect your insurance rates, but knowing in advance if there are specialty risks can help you to be more prepared. You may want to budget for periodic tree trimming services if there are lots of wind issues, for example. Even if a casualty event is insured, there are certainly headaches and costs associated with damage, including the need to assist a tenant with alternate living arrangements if a property is uninhabitable. Choosing properties that minimize this kind of risk is best when possible.
Location, Demographics & Crime
Many factors impact the desirability of a rental unit and correspondingly the ease of renting to reliable tenants for a competitive rate. Be sure to evaluate the quality of a neighborhood and think in terms of what may be in store in the future. A neighborhood that is in decline is probably not where you want to put your IRA dollars. Conversely, a neighborhood that may have some challenges today, but is being improved as houses turn over to new owners can have potential upside in terms of future rent rates and property appreciation.
There are many resources in most cities to evaluate crime statistics, but it is also helpful to know what the economic circumstances are. What percentages of homes are owner occupied vs rented out? Are people in general moving into or out of the neighborhood? If there are one or more primary employers in the area, do they look to be there long term? Are they expanding or laying workers off?
Knowledge Mitigates Risk
The more you understand a property and neighborhood, the better you will be able to foresee potential issues that may occur over time. Be sure to put in the effort to research any potential investment property you plan to acquire with your self-directed IRA or Solo 401(k) plan. You will be glad you did.
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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.
