QUESTIONS YOU SHOULD ASK
A Guide to Choosing a Self-Directed IRA Provider
C hances are, you’ve been hearing about self-directed individual retirement accounts ever since you started investing in real estate. On the surface, self-directed IRAs seem cumbersome and complex. When tax rates are low, self-directed IRAs may not seemworth the trouble. But any rise in the personal income tax rate or cap- ital gains rate can cause many investors to give self-directed IRAs a closer look. Investors usually start by searching the Web. So much information, so many opin- ions and, as one of my lawyer friends says, “I can go to the Web and find data to support the conclusion I want.” So you dig a little deeper, talk to your advisers and friends. My suspicion is that the information you get from them is of better quality but still not quite the depth you need. Next, as we have all done in the real estate world, you attend a seminar or two. These tend to be more about sales than substance, but again, you gain a little more knowledge. The first step in investing with a self-di- rected IRA is choosing a provider. For the purposes of this discussion, a provider is an entity or group of entities that includes cus- todial and possibly administrative services. The choice of provider is probably the most important decision in the process because you want this to be a long-term relationship. You want to be able to rely on your provider to complete your transactions efficiently and as seamlessly as possible. After all, real estate is complicated enough without having another hurdle to jump over. You want the provider to ensure that you’re in compliance with all of the relevant IRA rules and regulations (especially since this is their primary function) and to report required data to the Internal Revenue Ser- vice regarding your account.
In choosing your provider, you’ll need to determine the level of services required, gain an understanding of what the provid- er’s transaction process is and inquire about the provider’s customer service as well as understand the fee structure. Your real estate investment should be the driver to determine the level of service you’ll need. You want to keep in mind your real estate strategy, including purchase, holding period, any asset main- tenance and exit strategy. If you plan to invest in a private place- ment, you may only need custodial services. On the other hand, if your investment is a rehab project, you’ll need a higher level of administrative services. If you are new to self-direction, start with something you know. If you like buy-and- hold, don’t make your first self-directed IRA investment a rehab project. As one of my associates says, “Self-direction is the most complicated easy thing you’ll ever do.” Also, real estate investors tend to be entrepreneurial, independent self-starters. With self-direction, others need to be in- volved to some degree, so be prepared. Now that you’ve assessed the level of service you’ll need, you need to gain an understanding of your prospective provid- er’s transaction process. Call your prospec- tive provider and ask, “What is the process to purchase real estate?” This might seem like a simple question, but be sure you get a detailed answer. First, understand that real estate investors are not the only investors utilizing self-directed IRAs, and the process and paperwork is different for purchasing gold bullion, for instance, than it is for real estate. Also vague, short or hurried answers should tell you that maybe that provider is not for you. Again, going back to your intended
investment, choose a provider that seems to be a good fit for you. If your investment is rather simple, then you probably won’t need a lot of hand-holding, so a provider that is more along the lines of an or- der-taker might be satisfactory. If, on the other hand, your transactions tend to in- volve many parties or are time-sensitive, a provider that is involved at the beginning of your transaction will be better than one that only wants final documents. Next, you should assess the customer service departments of your prospective providers. These are the people with whom you will be spending the bulk of your time. Apart from the obvious techni- cal competence, what else are you looking for? The provider you choose should add value to your investment team. Talking with existing clients of prospective pro- viders will be insightful and invaluable. You should also bypass the market- ing department and call the customer service line directly, as if you are an ex- isting client with a real estate purchase. • Do you wait on hold? If so, how long? • Do you get to speak with the same customer rep for follow-up? • Do you have to re-explain issues? If your investment is simple or doesn’t
30 THINK REALTY INVESTOR REVIEW
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