How to Value Illiquid Investments Within Your Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: October 31, 2018)

Because self-directed IRAs allow you to invest in a broad variety of asset classes – including many asset types that traditional IRA custodians choose not to permit – you may elect to use some of the funds in your account to buy assets that are relatively illiquid. These might include real estate, private equity investments, as well private mortgages and other types of debt.

Even for good investments, a lack of liquidity provides some challenges; not the least of which is knowing the current value of those investments in your account. Here are some tips for valuing illiquid investments within your self-directed IRA.

Understand the Reasons for Your Valuation

The methods you use for valuing any illiquid investments you hold within your self-directed IRA depend in large part on why you’re doing the valuation.

Are you getting ready to reduce or sell your investment holding? If so, then having an accurate measure of value will be extremely important. After all, you don’t want to leave some of your investment gains on the table by accepting a price that’s too low. On the other hand, if you’re simply looking to come up with an estimated value for your overall portfolio, then getting a precise valuation for your illiquid asset will be somewhat less important.

At the end of the day, you’ll need to choose whatever method best fits your needs, and gives you a valuation that you’re most confident in.

Use Multiple Methods

Once you understand more about the task ahead of you, you’ll need to begin identifying different methods of valuing the illiquid investments in your account. It’s important to seek out multiple methods, because the more information and options you have about the value of your investment, the more likely it will be that you can determine its true value.

For example, when it comes to valuing residential real estate investments, your first method is likely to be identifying recent sales of comparable properties in the same or similar neighborhoods. This can help you determine just how much an unrelated buyer and seller actually valued the property.

You might also obtain a second opinion by giving a professional appraisal done on the property. You could even contact local real estate agents in order to come up with a market value for the property.

Conduct Periodic Valuations

It’s also a good idea to periodically value all the assets in your self-directed IRA – even the illiquid assets. By doing so he’ll have greater insight into the changing macro-level market factors that may be affecting the value of your investments. The frequency of these valuations will likely depend on your investment timeframe. For example, for a long term speculative real estate holdings (such as undeveloped land), then you may not need to concern yourself with valuation any more frequently than every year or two.

The best way to make solid investment decisions with your self-directed IRA is to have accurate and timely information. Make sure you know what each investment in your portfolio is worth, even the highly illiquid ones.


2 thoughts on “How to Value Illiquid Investments Within Your Self-Directed IRA

  1. Real Estate appraisal follows specific rules known as the Uniform Standards of Professional Appraisal Practice (USPAP). The rules state that there are only three ways to value real property.

    1. Cost – “What would it cost to reproduce the current asset?” Then apply depreciation to the asset for age. If the materials to build a house cost $100,000.00 and labor is $100,000. Then the house is worth $200,000.00. There are tables like Marshall and Swift that appraisers use to get values then the appraiser applies a local market factor to the materials that would account for shipping and etc. This method is used only for improvements. The land is valued separately because you can’t make more land. Works best for new construction.

    2. Market – “What is the selling price for properties with similar features?” Taking into account size, location and condition. Adjustments are made to the comparable properties and not to the subject. There are other rules that also apply such as: arms length transaction, no duress, exposure to market and etc. Works best for existing properties.

    3. Income – “How much income does the property produce?” Then the income is capitalized on an annual rate. If a property produces income of $1,000.00 per month or $12,000.00 per year and the capitalization rate is 10% then the property is worth $120,000.00. The income should include only the net operating income and would not include debt service. Works best for income properties.

    Any appraisal is subjective and the value of a property which recently sold can vary considerably after only a very short time. An appraisal should include the qualifications of the appraiser and the purpose of the appraisal.

    This is only a brief discussion of real estate appraisal and the fundamental principals that apply to the appraisal of any asset. The difficulty then is to gather enough data to form an valid opinion.

  2. James, so very true. The important thing here is to ensure you are valuing your assets accordingly before you invest. Do your research and understand as much as possible about the investment opportunity. Then invest accordingly if the asset is worthwhile. Thanks for the input!

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