How to Confidently Assess Any SDIRA Investment in 6 Battle-Tested Steps
In my 30+ years working with self-directed IRA (SDIRA) investors, I've learned that the most successful ones aren't necessarily the ones who find the highest-return deals. They're the ones who consistently do their homework before they write the check.
The difference between a profitable alternative investment and a costly mistake often comes down to one thing: due diligence. Yet this is exactly where I see even sophisticated investors cut corners.
Make no mistake, the success of the alternative investments you hand-pick for your SDIRA hinges not on promises but on your vetting process.
What Alternative Assets Can You Invest in Through Your SDIRA?
Let’s run through the types of assets you can target through your SDIRA. You have plenty of options compared to a traditional IRA, but that freedom and flexibility come with greater responsibility.
This isn’t an exhaustive list, but rather an overview of the most popular alternative investments:
Real Estate. Commercial, residential, raw land, and everything in between.
Promissory Notes. Private lending opportunities with fixed returns.
Private Equity & Startups. Early-stage companies and growth investments.
Private Placements. Limited partnerships and structured investments.
Commodities & Natural Resources. Energy, agriculture, and raw materials.
Tax Lien Certificates & Deeds. Government-backed investment opportunities.
Your ability to self-direct the investments within your IRA offers real potential for targeted, intentional portfolio growth based on your goals.
Warning: Prohibited Transactions
SDIRA transactions may have more flexibility in terms of investment opportunities, but strict regulations govern them. Violations result in account disqualification, which means hefty tax penalties. The IRS takes it all very seriously, and so do I.
You can have the best investments in your portfolio, but it won’t matter if you break these rules:
No Self-Dealing
Self-dealing is broad, but it comes down to you or disqualified persons personally benefiting from SDIRA investments. This includes:
Using SDIRA funds or assets for personal benefit
Providing services to the SDIRA investments (even unpaid)
Buying, selling, or leasing property between your IRA and yourself or certain family members
Using SDIRA assets as security for a personal loan
No Involving Disqualified Persons
IRS rules prohibit transactions between your SDIRA and disqualified persons:
You, the IRA owner
Your spouse
Your ancestors (parents, grandparents)
Your lineal descendants (children, grandchildren)
Spouses of your children or grandchildren
Any fiduciary or person providing services to the IRA
Any entity (LLC, trust) owned 50% or more by you or other disqualified persons
No Outside Accounts
All expenses and income from investments must flow through the SDIRA, never a personal bank account.
No Hands-On Involvement
Finally, SDIRA owners aren’t allowed to be hands-on with the investments. For example, you can’t DIY renovations on an investment property in your IRA.
I find it helpful if clients think of their SDIRA not as something they own, but as a separate entity. You can hand-pick the investments that go into the IRA, but a qualified custodian must hold the IRA itself.
6 Steps to Confidently Assessing Self-Directed IRA Investments
1. Understand the Asset Type
Before you commit any portion of your SDIRA to an unfamiliar investment, you must understand what you're getting into. I tell my clients to start with the basics: Does this investment align with your financial goals, risk tolerance, and investment timeline? Just because an opportunity is objectively “good” doesn't mean it belongs in your portfolio.
Once you've determined the investment fits your strategy, dig into the asset class itself.
For real estate opportunities, a comprehensive real estate investment analysis includes examining historical performance data, understanding market demand, rental yields, vacancy rates, and property appreciation trends.
For private equity deals, thorough private equity due diligence involves scrutinizing the management team's track record, business model viability, competitive landscape, and exit strategies. Pay close attention to liquidity constraints and regulatory changes across all asset classes.
2. Verify the Sponsor/Provider
Even when an investment looks perfect on paper, the deal's success often comes down to who's behind it. I've seen too many clients get burned by sponsors with impressive marketing materials but questionable track records.
Take turnkey real estate — since SDIRA owners must invest passively, many choose turnkey providers. But not all are equal. Some deliver exactly what they promise, while others leave you with problem properties and vanishing customer service.
I always tell my clients to dig deep into the provider’s background. Look at their actual track record — not just the testimonials on their website. Check for litigation history, verify their credentials, and check Better Business Bureau ratings. If they're SEC-regulated, review their filings.
Most importantly, ask for references from current investors and actually call them. Any legitimate sponsor should be happy to connect you with satisfied clients. If they hesitate or make excuses, proceed with caution.
3. Analyze the Financials
Numbers don't lie, but they can mislead. After three decades evaluating deals, I've learned that the quality of financial documentation reveals far more than projected returns.
Request complete financial packages: offering memorandums, business plans, cash flow projections, and legal structures. Don't accept summary sheets as primary data sources. If sponsors resist providing detailed financials, that's a red flag.
Look for consistency across documents and realistic assumptions. Pay special attention to exit strategies — vague language like "subject to market conditions" should concern you. Compare everything against your investment targets and risk tolerance.
4. Clarify the Fee Structure
Fee transparency separates legitimate deals from potential problems. I've seen clients surprised by management fees, acquisition costs, and exit charges that weren't clearly disclosed upfront.
Request a complete fee breakdown that includes management fees, acquisition costs, ongoing operational expenses, and exit fees.
Don't forget your SDIRA custodian's processing and asset management charges — these vary significantly between providers. A deal promising 12% returns with 3% in annual fees delivers very different returns from what was advertised.
5. Assess Investment Liquidity
Liquidity matters more than most investors realize, especially as you approach RMD age. I've had clients scramble to sell illiquid investments at losses because they needed funds for required distributions.
If the investment is illiquid, ensure it represents an appropriate portion of your total SDIRA balance and that you have other liquid assets available for RMDs.
6. Confirm IRS Compliance
Before investing, verify the deal doesn't involve you, your family members, or other disqualified persons I listed above. Remember, you must remain a passive investor — no sweat equity allowed.
When in doubt, consult an attorney or CPA familiar with self-directed IRA rules. The cost of professional advice is minimal compared to IRS penalties for violations.
Focus Your Energy on the Right SDIRA Due Diligence Best Practices
Smart SDIRA investors know that alternative investments require heightened vigilance and specialized knowledge to navigate successfully while avoiding costly compliance mistakes.
Work with experienced professionals only. Choose SDIRA custodians, CPAs, attorneys, and RIAs who specialize in alternative assets.
Start small and test. Try new asset classes with smaller allocations before committing to significant portions of your IRA.
Diversify strategically. Spread your SDIRA funds across multiple asset types and deals to mitigate risk.
Verify independently. Never rely solely on sponsor-provided information — conduct your own research.
Read every document. Understand all legal agreements and operating documents before signing.
Stay grounded. If returns sound too good to be true, they probably are.
How Chicago Trust Administration Services Can Help
At Chicago Trust Administration Services, we've spent over two decades helping sophisticated investors navigate the complexities of self-directed IRA investing. We don’t provide investment advice, but invaluable regulatory guidance and administrative support that keeps you compliant while you focus on building wealth.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
___________________________________________________________________________
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.