Purchasing and owning real estate in your IRA, whether it’s a single family rent house, vacant land or a 50 unit apartment building, it will require a time-consuming process of additional due process. It means taking caution, performing calculations, reviewing documents, procuring insurance, walking the property, essentially doing your homework for the property before you actually make the purchase. Here are a few of the steps:
Know the contract. Read the contract. Be one with the contract. The contract should allow you time, from one week to a couple of months, depending on the nature of the investment property, to perform due diligence and be able to walk away for any reason and have your earnest money returned in full. If you need help with the contract, rely on a real estate professional or an attorney experienced in commercial real estate. If a seller pushes you vigorously to shorten your time-frame, train your mind to hear a warning buzzer.
One of the first things you should examine as part of your due diligence is the title history on the property. All title documents are public records that can be researched and reviewed. A thorough title review will expose whether there is any litigation pending that might threaten the title of the property, whether the seller actually has title to the property, and whether the seller has any encumbrances or financial obligations attached to the property such as a mortgage or tax lien.
Have a professional inspection performed on the property. A licensed, professional inspector can review the structural integrity of any building on the property and can also point out any potential physical problems with the property.
An appraisal will give you a third-party estimate on the value of the property. This will tell you whether the amount of money you’re about to spend on the property is worth what you think it is. Appraisals are generally necessary if you want to finance the real property purchase with a mortgage loan, but you should get an appraisal even if you are paying cash because it will help you evaluate the value of the investment.
If a visual inspection of the property reveals any potential environmental hazards or problems, you should consider ordering an environmental assessment of the entire property. Things that might cause you to order an environmental report include leaking gas or oil containers, former use of the property as a manufacturing or mining facility, or possible wetlands or clean water issues associated with water on the land.
Land Use Controls
Your final consideration should be whether the property is zoned for the purposes that you want to use the property for. For example, if you want to use the property to start a business, you need to verify with the local zoning authority that the property is zoned for commercial or that you have a reasonable chance of having the property rezoned as commercial.
Commercial Real Estate
Requires more in-depth due diligence and you will want to get a rental history, vacancy rates, maintenance fees, property management fees (if property management needs to be hired out), taxes, insurance, leases (read the leases very carefully – Triple net? – who pays what? – who’s responsible for what? ect.). You’ll want to investigate your financing options, determine your fixed and variable costs, in order to see if your return on investment is in line with what you had in mind.