Capital is any valuable asset that can be used for transactions. It could be intellectual property, a factory and its inventory, financial assets (stocks, bonds, mutual funds), bank deposits, or cash.
Capital is often described as money but all money is not capital and all capital is not money. Money becomes capital when it is used for investments and capital can take many forms besides cash.
- Capital is used for transactions
- There are different types of capital: working capital, debt capital, equity capital and trading capital
- Analysts consider capital when evaluating the finances of a person, family, business, or economy
- Most businesses need some form of capital to operate
The most common types of capital in commercial real estate are: working capital, equity capital, debt capital and trading capital. Let’s take a look at each one.
Working capital is the sum of liquid assets available to a company for daily transactions. Liquid assets in this context refer to cash in hand or assets that can easily be converted to cash without being devalued.
Working capital determines a real estate company’s short-term liquidity. It is calculated by subtracting the current debts from current assets.
Use the following formula to calculate working capital:
Current Assets – Current Debts = Working Capital
Equity capital is the money paid by investors into a real estate business in exchange for shares or stocks. These extra funds allow an investor to purchase more assets or upgrade their operations. Equity capital does not attract any interest rate so it is a popular form of capital for real estate investment firms.
Equity capital also refers to the capital on hand after all mortgages on properties have been deducted from the total value of current assets. It can be private or public.
Public equity capital is acquired when the company is listed on the stock exchange, but private equity capital is raised by a group of investors.
Debt capital is the capital a real estate investor acquires by borrowing, either from an individual or from a financial institution. Debt capital attracts interest. The business has to generate enough revenue to repay the debts and their interest and also generate profit.
Trading capital is the amount of money a real estate investor has for daily transactions. Every real estate investor needs a significant amount of money to create profitable returns. Trading capital is particularly important for brokerages and other business ventures that trade every day.
Frequently Asked Questions About Capital
What is capital to a real estate investor?
To a real estate investor, capital is the money needed to invest in more projects and cover the day-to-day transactions of their business, both short or long-term. It also includes the money in the bank and assets that can be exchanged for cash, it might also be any proprietary systems or inventions.
How can I convert my money to commercial real estate capital?
You can start by buying a property and collecting rent. Once you buy a home for the purpose of receiving income from it, that money becomes capital. This is the most common form of real estate investment. You could also invest in real estate wholesaling or a real estate investment trust (REIT). Each investment type has advantages and disadvantages. Always do your research.
Do I need a professional real estate advisor before I invest?
No, you don’t, but it might be a good idea to get one if you can afford it. An experienced real estate advisor can help you navigate the real estate financing landscape. If your plan is simple and funds are scarce then you might not need one.
However, if you want to follow an investment strategy, it is best to collaborate with a real estate agent. With an agent, you will have access to multiple listing services, valuable market advice, and negotiation tutorials that’ll help you succeed.
What is the best capital a beginner can use?
The best capital for beginners is cash. This way, you don’t have to pay any interest or repay any loans. However, if you do not have cash at hand, a traditional mortgage is an easier way to fund the purchase of a property.