Buying a tenant-occupied Michigan rental with a self-directed IRA

A tenant-occupied rental comes with more than a roof and a set of keys. It also comes with leases, payment records, deposits, notices, maintenance history, and promises the seller may have made. Those records can change the value and day-one workload of the property. A self-directed IRA buyer has another concern: the account must be ready to receive the income and pay the bills without relying on the owner's personal money or labor.

The cleanest approach is to review the real estate and the tenancy at the same time. Do not wait until closing to learn what the tenants were told, where their deposits are held, or who handles an emergency repair. In Michigan, some of those details are governed by state law, while registration and inspection requirements may depend on the city, village, or township where the property sits.

Reconcile the rent roll with the signed documents

Start with a unit-by-unit rent roll, then prove each line against the file. The lease is only the beginning. Addenda, renewals, side letters, emails about concessions, and written payment plans may change what the printed lease appears to say. Compare those documents with the rent ledger and recent bank or management statements. A rounded monthly-income figure on a marketing sheet is not enough.

• Tenant and unit shown on each signed lease
• Lease start, expiration, renewal status, and any notice already given
• Contract rent, recurring fees, concessions, and the current amount actually charged
• Payment history, unpaid balances, credits, and prepaid rent
• Security deposit and other tenant funds held for the unit
• Responsibility for utilities, lawn care, snow removal, repairs, and shared areas
• Parking, storage, pets, appliances, and other rights promised in writing

Differences need an explanation and supporting records. A ledger may show a lower payment because of a valid concession, a disputed charge, or a data-entry error. Those are not the same issue. Ask the seller and property manager to reconcile the file in writing, and have the buyer's Michigan attorney review lease enforceability, notices, defaults, and any proposed assignment documents.

Treat security deposits as tenant money, not sale proceeds

Michigan Compiled Laws section 554.602 limits a residential security deposit to one and one-half months' rent. Section 554.604 generally requires the deposit to be placed in a regulated financial institution unless the landlord follows the statute's bond procedure. Section 554.605 describes the deposit as the tenant's lawful property until the landlord establishes a right to it under the act.

A sale does not erase that obligation. Under section 554.614, the departing landlord remains liable for the deposit until it is transferred to the successor and the tenant receives written notice by ordinary mail of the transfer and the successor's name and address, the successor complies with the statute's deposit requirements, or the deposit is returned to the tenant. The closing file should identify the amount for every unit, how it will be credited or transferred, who sends the notice, and where the money will be held after closing.

Also request the commencement inventory checklists. Section 554.608 requires their use when a security deposit is required and gives the tenant a process for recording the unit's condition. A missing checklist does not tell a buyer who caused a stain, broken fixture, or damaged door. It does tell the buyer that deposit claims and condition records deserve legal review before a value is assigned to them.

Match the paperwork to the building

Walk every unit that the contract and tenant rights allow you to inspect. Compare the physical condition with inspection reports, maintenance logs, open work orders, tenant correspondence, and the seller's representations. Look for repairs that were promised but not completed. Ask whether any unit has recurring water, heat, electrical, pest, or safety complaints. A new owner inherits the building's condition even when the problem never made it onto the rent roll.

Confirm which smoke alarms, carbon-monoxide alarms, locks, handrails, exits, mechanical systems, and other safety items the inspector and applicable authorities expect for the property. Ask the local building or rental-housing office whether the address requires registration, a certificate, periodic inspection, or correction of an open violation. West Michigan municipalities do not all use the same program, so verify the exact address with the authority that administers it.

For a small multifamily property, check whether the current number of units and their use agree with zoning, building records, and the title documents. A second kitchen or separate electric meter does not prove that a unit is lawful. If the file and the building tell different stories, have the attorney and local officials resolve the discrepancy before the due-diligence deadline.

Review the process without grading the people

Tenant due diligence is about contracts, money, condition, and compliance. It is not an invitation to sort tenants by personal characteristics. HUD states that the federal Fair Housing Act prohibits housing discrimination because of race, color, national origin, religion, sex, familial status, or disability. Michigan and local law may add requirements or protections that also apply to leasing, renewals, notices, screening, and property management.

Have counsel review the seller's written rental criteria, application records, accommodation requests, notices, and management practices without using protected information to decide whether to buy or how to treat an existing tenant. After closing, apply lawful policies consistently. A property transfer is not a reason to ignore an existing lease or make different rules for different households.

Set up the IRA's operating path before closing

The rent collection plan should name the account or payee exactly as the self-directed IRA custodian requires. Confirm where tenants will send rent, how deposits and prorations enter the account, who maintains the ledger, and how the property manager receives authority to handle routine work. Tenant funds that the landlord holds should remain separately accounted for under the applicable rules rather than being treated as rental income.

Map the expense side as carefully as the income side. The IRA needs a workable process for management fees, utilities, taxes, insurance, emergency repairs, and larger capital work. Ask the custodian how invoices are approved and how quickly funds can be sent. If the account cannot respond when a furnace fails in January, the problem is operational, not theoretical.

The IRS describes improper use of an IRA by its owner, beneficiary, or another disqualified person as a prohibited transaction and lists buying property for present or future personal use with IRA funds as a possible example. The buyer should not plan to occupy a unit, rent one to a disqualified person, perform repairs personally, or cover a property bill with personal funds without first obtaining transaction-specific guidance from the custodian, CPA, and attorney.

Put a dollar beside each unresolved item

A tenant-occupied property can produce rent on the first day and still need cash immediately. Build the operating review from verified leases and actual records, not a fully occupied forecast. Separate collected rent from billed rent. Price known repairs, near-term replacements, unpaid utilities, management setup, legal review, local inspection work, and the cash reserve the account will retain after closing.

Do not assume every delinquent balance will be collected, every tenant will renew, or every unit will remain occupied. Rents, expenses, occupancy, and results are not guaranteed. The useful question is whether the IRA can handle the property under more than one reasonable budget while the buyer's advisors finish the legal, tax, and account review.

Write the records review into the offer timeline

Ask for the lease files, ledgers, deposit accounting, inspection records, notices, service contracts, utility information, and local compliance documents early enough to read them. Give the attorney, inspector, property manager, insurance professional, and custodian time to follow up. If a tenant's privacy limits access to a document, use a lawful redaction or another review method approved by counsel rather than collecting personal information that the buyer does not need.

• Assign each missing document or discrepancy to a person and a deadline
• Require seller updates if rent, occupancy, notices, or property condition changes before closing
• Confirm the closing statement handles rents, deposits, credits, and approved costs as the parties and custodian require
• Prepare tenant communications and management instructions with legal review before possession changes
• Keep enough contingency time for local records, custodian approval, and follow-up inspections

This article is educational, not legal, tax, financial, property-management, fair-housing, retirement-plan, or investment advice. No property, lease, ownership structure, or strategy is approved or endorsed by the IRS. Have your own self-directed IRA custodian, CPA, Michigan attorney, property manager, inspector, insurance professional, local authorities, and other qualified advisors review the account, tenant files, property, and transaction before taking action.

Keep a closing file that works on day one

The final file should contain every lease and amendment, the reconciled rent ledger, deposit records and transfer notices, condition checklists, open maintenance items, inspection and registration records, vendor agreements, insurance documents, custodian instructions, and the closing statement. Add a simple contact sheet for tenants, management, utilities, local offices, and approved repair vendors. The point is not paperwork for its own sake. Someone should be able to answer the first rent question or repair call without guessing where the records went.

Primary sources for this review include Michigan Compiled Laws sections 554.602, 554.604, 554.605, 554.608, and 554.614; HUD's Fair Housing Act overview; and the IRS guidance on prohibited transactions. These sources set general rules. The answer for a particular lease, tenant file, municipality, property, and IRA belongs to the buyer's own qualified advisors.

Rennie can help identify tenant-occupied property in West Michigan and coordinate the real estate documents, inspections, and offer deadlines. Lease conclusions, tenant-law compliance, property management, and retirement-account decisions stay with the buyer's own attorney, custodian, CPA, and other advisors.