Tips for Valuing Illiquid Investments In Your Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: August 12, 2019)

In fact, you’re probably already somewhat familiar with this concept if you own your own home. You can get estimates of your current home value, but you’ll never really know exactly what it’s worth until you put it on the market and entertain offers.

Let’s take a look at some tips for how you might value illiquid investments that you hold in your self-directed IRA.

1. Define the Nature of the Illiquidity.
First, it might prove useful to identify the nature of the illiquidity. Is it simply due to a market downturn that’s resulted in less trading volume? Does the underlying investment have legal restrictions on you selling or transferring it (as is often the case with private equity investments)? By understanding why your investment may be hard to value or not, you’ll gain insight into not only how much it might be worth, but whether the factors that contribute to the illiquidity are short-term or long-term.

2. Consider Your Own Prior Experience.
When you first purchased the illiquid investment, how did you find it? How did you determine then what was an appropriate price to pay to acquire it? Use those same techniques to put yourself in the shoes of a prospective buyer. What factors and considerations will they use to calculate the worth of the asset?

Of course, this method can change over time. Markets for investments come online and develop, and there may be more information out there than there was when you first acquired the asset – For example, think about how much easier it is now to estimate the value of a piece of real estate with all of the online information that’s available.

3. Find Comparables.
Again, taking tips from real estate markets can be instructive. In order to determine the market value of a particular property, an agent or prospective buyer will identify recent sales of similar properties in the same or nearby neighborhoods in order to come up with a baseline for valuing a property.

The more recent the sale is, and more similar the property is to yours, the more valuable that information will be. Look to find a way to compare aspects that may be different but related to yours. For example, real estate buyers may look to a price per square foot measure as a way to compare properties of different sizes.

4. Find an Expert.
Finally, it’s likely safe to assume that whatever type of asset you’re talking about, there are others who have significant experience dealing with it. Nice experts may offer valuation services to help you be confident that, when it comes time to dispose of the asset, you’re able to get the best possible value. Be sure to ask for references and information about past deals for clients in order to feel confident that you’re dealing with someone who can provide you with the most help.

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