How to Value Illiquid Investments Within Your Self-Directed IRA

Estimated reading time: 3 minutes

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.