Capital
Capital can come from different sources. Most projects require some kind an investment from the ownership team. Sometimes, a property already has capital built into it; this is called equity - the value in a property not owed to anyone else. So, if you've got a building worth $500,000 and you've got a $300,000 loan on it, that building has $200,000 worth of equity. This can be considered part of the deal's capital.
In addition to real estate equity, there's also cash provided by the ownership team and equity raised specifically for the deal. Sometimes this money comes from friends and family. Other times it's raised from professional investors. These “private equity” investors use their personal wealth to lend to real estate projects. They typically have specific criteria for the kind of deals they'll do, the amount of capital they'll invest, and the markets they'll invest in. The key thing about equity investment is that equity investors are paid based on how well the project does. They're part owners, and while they sometimes get a preferred interest rate too, their total payout is always tied to the deal's performance.
Then there's debt, which comes in a bunch of different forms. Most people are familiar with bank debt, like a mortgage on a private residence. This kind of debt is available for commercial real estate as well. Private lenders, also known as hard money lenders, also provide debt for development projects. They tend to have specific criteria for how they lend and are more expensive than banks. Private lenders are easier to borrow from and sometimes provide more capital than banks. Other kinds of institutions also lend on real estate deals, especially larger ones. Debt typically has a stated interest rate – fixed or variable – must be repaid even if a project fails and is owed before equity is returned.
Capital structures can become more complicated as deals get bigger, and there can be multiple layers of debt and equity. A larger real estate project can be funded by equity and debt, but also grants, money from government programs, tax credits, and other sources. And, if a loan requires a personal guarantee, the person who signs is supplying capital for the deal by taking on risk.
So, as you can see, capital comes in different forms and from different sources, so it's critical to understand the benefits, costs, and risks of each
