Which Kinds of Funds Do Firms Accept From Investors?
When investors consider contributing to a private investment vehicle—such as a real estate debt fund—it’s crucial to understand which types of capital are typically permitted by firms. Not all money is created equal in the eyes of investment compliance and fund strategy. From understanding what qualified funds are to navigating IRS and anti-money laundering regulations, investors must carefully evaluate whether their investable assets are eligible for use.
This article breaks down the investable assets definition, explores the differences between qualified vs non-qualified funds, and explains what firms look for during due diligence.
Understanding Investable Assets
Before committing capital, investors must first determine what constitutes investable assets. In simple terms, investable assets are holdings that can be readily deployed into an investment. This typically includes:
Cash and cash equivalents
Brokerage accounts (stocks, ETFs, bonds)
Retirement accounts (e.g., IRAs, 401(k)s)
Trust assets
Custodial accounts
The investable assets definition does not include real estate held for personal use, collectibles, or business ownership unless those are liquidated first.
What Are Considered Qualified Funds?
Many investment firms prioritize the use of qualified funds for regulatory and operational reasons. But what are qualified funds, exactly?
Qualified funds typically refer to capital that originates from accounts considered tax-advantaged under U.S. law—most commonly:
Traditional IRAs
Roth IRAs
SEP IRAs
Solo 401(k)s
Defined benefit plans
These accounts must usually be self-directed and administered by a qualified custodian in order to be used for alternative investments like private real estate debt funds. Using qualified funds allows investors to maintain the tax-advantaged status of the account, though IRS regulations still apply.
Qualified vs Non Qualified Funds: Key Differences
Understanding the distinction between qualified vs non qualified funds is crucial. Here's a quick comparison:
While both types of capital are often accepted by firms, each comes with unique tax implications, contribution limits, and reporting obligations. Some firms may restrict or prefer certain types of funds based on compliance or fund structure.
Are IRAs Liquidated Before Use?
If you plan to use a Traditional or Roth IRA to invest, you typically do not need to liquidate the account entirely. Instead, the self-directed IRA custodian facilitates the investment directly from the account. For example:
The investor sets up a self-directed IRA with a qualified custodian.
The investor instructs the custodian to fund a specific investment (e.g., a real estate debt fund).
The custodian transfers the funds directly to the investment firm on behalf of the IRA.
This allows the investment to remain within the tax-sheltered status of the retirement account.
However, any attempt to personally withdraw and reinvest the funds could trigger taxes and penalties. That’s why working with an experienced custodian is essential.
What About Cash?
Surprisingly, not all firms accept cash as an acceptable source of investment. While cash is technically liquid, some fund structures and custodians may not allow wire transfers or direct personal contributions in the form of cash. This is often due to:
Anti-Money Laundering (AML) concerns
Know Your Customer (KYC) compliance protocols
Lack of traceable financial documentation
Firms must verify the origin of funds to remain compliant with federal regulations. Cash—especially when deposited in large sums—is difficult to trace and can trigger red flags. As a result, many firms require funds to be transferred from a financial institution that can document the source.
Borrowed Funds and Margin Accounts: Are They Acceptable?
Most investment firms prohibit the use of borrowed capital—such as personal loans or margin debt—for funding private investments. If they do allow it, full disclosure is typically required, and investors may need to demonstrate:
Their ability to service the debt
That the loan is not secured against the investment itself
That they understand the elevated risk profile
The rationale here is regulatory and risk-based. Investments made with borrowed funds could compromise the financial stability of the investor and create a liability for the fund manager.
AML/KYC Compliance and Due Diligence
Every reputable investment firm must follow AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations. These protocols are designed to:
Prevent illicit funds from entering the financial system
Ensure transparency around investor identity and fund origin
Detect patterns of fraud or suspicious activity
During the onboarding process, investors may be asked to provide:
Government-issued identification
Source-of-funds documentation
Bank statements or custodial transfer records
Proof of address and tax identification
These measures help firms verify that all investable funds are compliant with financial laws and not tied to criminal activity.
Choose the Right Partner
Before investing, it's essential to understand what investable assets are, how qualified vs non- qualified funds differ, and what kind of due diligence firms conduct to ensure compliance. Whether you're using qualified funds from a self-directed IRA or non-retirement investable funds from a brokerage account, aligning your capital source with the firm's requirements is key to a smooth investment process.
If you’re looking to grow your wealth through a private real estate investment, consider working with an experienced team that understands how to put your capital to work responsibly and in full compliance with industry standards.
To get started - or to speak with one of our team members - contact us today!
