Most individuals generally approach potential investments by looking for those that meet certain financial or business criteria. It’s often useful to approach investment decisions by identifying what characteristics you’re looking for.then analyzing the various possibilities you have available to find those that meet your criteria.
But it’s also important to be aware of certain types of investments that you’ll want to actively avoid. In the context of real estate investing. here are some factors to consider.
Avoid Rushed Transactions. Successful real estate investing often depends on having as much information as possible about a property before acquiring it. In addition to market research, you’ll also want to conduct a thorough inspection of the property itself, Often times you’ll need to bring in outside experts to help with the inspection, and this takes time to schedule and complete. Avoid transactions where you find the seller trying to unduly rush the process – if you haven’t had the time to complete your due diligence on any property, don’t be afraid to walk away from the transaction.
Avoid Leverage. When you’re looking at potential real estate investments for your self-directed IRA, it’s generally a good idea to avoid borrowing money to acquire property. Not only will leverage create UBTI (unrelated business taxable income) issues, but borrowing money will also put your IRA on the hook for paying that money back. Remember that any borrowing done by your self-directed IRA must be repaid with funds in or generated by your account – using outside money to satisfy the obligations of your IRA will trigger additional tax penalties.
This isn’t to say it’s never appropriate to use leverage. In fact, when used strategically it can greatly boost your investment returns. But you may need to change your mindset from many first time real estate investors who’ve only had experience with real estate in the form of taking out a mortgage to buy their own homes, and think that that’s always the best way to move forward.
Avoid Becoming Emotionally Involved. Finally, you want to avoid any temptation to become emotionally connected with any real estate investments you make. It’s easier to become attached to a home or piece of property than it is to a stock investment (although some investors do form unreasonable attachments to certain stock investment), and fail to treat the property for what it is – an investment that you’re purchasing with your self-directed IRA in order to build your wealth for retirement,, By introducing an emotional element into your investment decisions, it becomes much harder to reach your goals.
Again, this is likely to stem from the fact that many individuals form emotional attachments to the real estate that they purchase to live in. Make sure to draw a distinction between your personal real estate holdings and those you hold for investment purposes within your self-directed IRA.
By avoiding potentially problematic real estate transactions while you’re keeping an eye out for the best ones. you’re sure to reach your long term financial goals.