Your Complete Guide to Invested Capital in Real Estate
Turn your capital into a cash flow-generating machine. Whether you're a high-net-worth individual or a representative of a financial institution or family company, investment capital in strategic assets has the potential to significantly grow your income. At QC Capital, we have acquired over 500 multi-family units with a value amassing over $100 million.
Make the most of your money and enjoy wealth creation in some of the most attractive assets around. You owe it to yourself, your company, and those you love to optimize all capital invested.
Mastering the Fundamentals: What is Invested Capital in Real Estate?
Are you wondering, what is invested capital?
In general, invested capital represents money used towards funding an investment. For example, the invested capital of a realty company is all money used in acquiring, improving, and paying for upfront property costs.
As an investor, you need to ensure that your sources of invested capital are secure and trustworthy. The last thing you want to do is rely on an individual or company that is a liability.
There are generally two types of invested capital. These include debt and equity and can take many forms depending upon the involved parties and company deals.
Types of Capital Invested in Real Estate - And How to Secure Them
There are various types of invested capital. For example, when it comes to debt-invested capital, real estate investors typically receive this capital from hard money lenders such as banks. This capital structure usually requires paying interest, but the lenders do not take an ownership stake in the property.
The other type of invested capital is equity, which stems from private money lenders. These lenders will have a stake in the venture and may sometimes play a very active role.
Equity invested capital can include lucrative cash investments, for example, which signal that the partner is highly interested in the company's profitability.
Key Takeaways From Sources of Invested Capital
Any savvy investor must understand the value of various investments, the sources of total debt and total equity, and the total amount of invested capital. Whether for a small cash investment in a middling company or major loans for multiple assets or companies, the considerations of shareholders and debtholders are of paramount importance.
Private money loans are often available through various sources and in various forms. Practical examples include capital in the forms of cash, cash equivalents, securities, equipment, facilities, and more.
First, however, you have to determine the financial modeling for these ventures.
In other words, where are you getting the capital?
Invested Capital From a Business Associate
Sometimes, business partners will share the responsibility of property investments. Depending on how the duties are distributed, one partner may shoulder the workload and another may provide the majority of the finance.
Partners without substantial capital may handle the property acquisition and management.
Invested Capital From Crowdfunding or Syndicating
This source of private money can be great for maximizing your return on invested capital. That's because it draws from accredited groups of investors as well as online platforms. With potentially high-volume investor pools, various equity shareholders can invest in higher-value projects, businesses, and fixed assets.
Shareholders' equity is a crucial consideration when assessing total capital employed.
Invested Capital From Personal Relationships
Sometimes, one's partial or total equity may come from a friend, family member, or coworker. Potential investment from a personal relationship can carry the added benefit of certain exceptions. For example, if you personally know someone, it may be easier to work out a financing approach that is less stringent and more flexible.
If you've invested capital in real estate through a close friend or confidant, you may find it significantly easier to obtain additional funds. One example may be a long-time friend investing to make up for some short-term debt they owe you.
There are always ways to invest in assets, accrue funds, and obtain necessary financing. However, you should clearly understand factors such as non-operating cash and lease obligations before beginning.
There are many potential uses of invested capital to consider.
Top Invested Capital Uses in Real Estate
It doesn't matter what the company or companies are doing for value. Invested capital funds are always used for primarily two functions.
Firstly, invested capital allows investors to purchase fixed assets. These include things such as land plots, buildings and structures, and equipment. Secondly, invested capital allows investors to address daily operating expenses, optimize operating profits, and manage assets.
These are the main invested capital uses in real estate.
Company expansions are also common goals, as these can help increase the present value of investments while offsetting capital costs. Overall, sound capital ventures are great ways to reduce total debt, short-term debt, and long-term debt, while also reaping economic benefits.
Common Calculations For Invested Capital Use
Of course, the methods and metrics for determining a sound investment can vary widely.
A typical way to assess capital health is through the balance sheet and accounting records. For example, a company or group of companies may analyze capital thresholds, fixed assets, and projected capital needs to plan for future opportunities.
A downloadable excel template can help!
Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC)
When it comes to investing in real estate assets, the return on invested capital (ROIC) formula is an important consideration. The return on invested capital (ROIC) is simply the money companies make above the weighted average cost of capital (WACC).
The WACC, on the other hand, is the weight of total equity and total debt proportionate to the overall capital structure. So, if a return on invested capital (ROIC) calculation shows significant gains over the WACC, the capital invested is fruitful.
Meanwhile, the invested capital formula is the preferred manner of calculating invested capital. When used in conjunction with other formulas and calculations, the invested capital formula can help address factors such as net working capital, net operating profit, non-operating cash, capital lease obligations, and more.
The Invested Capital Formula - So How is Invested Capital Calculated?
Again, so-called invested capital is simply all money invested in a company by various shareholders, short-term debt holders, long-term debt holders, and lenders. The invested capital formula is usually calculated through one of two approaches.
For example, the company can use either the financing approach or the operating approach to determine invested capital in real estate. Each invested capital formula factors in different measures of company assets, debts, equity, liabilities, investments, and other capital.
Depending upon the accounting records, the investment's profile, and other available information, there are many ways to answer, how is invested capital calculated?
Using the Operating Approach for Net Working Capital
The operating approach for capital invested is essentially Net Working Capital + Property, Plant & Equipment (PP&E) + Goodwill & Intangibles. This form of the invested capital formula is mostly concerned with, for example, tangible items, assets, and property.
To make this invested capital calculation, you need to first understand the net working capital formula, which is obtained when you subtract cash liability values from assets. In other words, net working capital is current assets minus current liabilities.
For example, if a company has $200,000 of current assets and $70,000 of current liabilities, its working capital is $130,000. This $130,000 can be used for any short-term finance reasons.
Positive working capital indicates that the company may cover some short-term and long-term debt, with additional cash left over.
Meanwhile, Property, Plant, and Equipment (PP&E) refers to most facilities, equipment, land, furnishings, vehicles, and other tangible assets, while Goodwill & Intangibles refers to copyrights, branding, and proprietary technology.
When these two factors are added to Net Working Capital in the invested capital formula operating approach, you get the capital invested.
The Financing Approach to Calculate the Invested Capital
Alternatively, you can use the financing approach to the invested capital formula to find the total capital invested. You simply need to add Debt & Leases + Equity and Equity Equivalents + Non-Operating Cash & Investments for this invested capital calculation.
For Debt & Leases, you need to add short-term debt, long-term debt, and present values of leases. For Equity and Equity Equivalents, you need to add common stock and retained earnings. Finally, for Non-Operating Cash and Investments, you must add cash from finance and cash from investing.
Once you have these three company totals, the final step is to add them together to calculate the invested capital value.
If you struggle to calculate invested capital with the invested capital formula, are confused about net operating profit, or need help anywhere else, don't delay.
Maximize Your Invested Capital
Many investors have trouble identifying productive fixed assets. They don't grasp concepts like additional paid-in capital or long-term debt. They don't know how to properly utilize non-operating cash flows.
They fail to meet lease obligations, mismanage total equity, and stare at the invested capital formula in frustration and confusion.
Do you know the tax rate? The company profits? Can you record accounts payable and non-operating assets? Can you calculate the invested capital in real estate with the right capital formula?
What's your operating income? What's your accumulated depreciation?
Don't be an investor who's just following articles that spout nonsense. Don't rely on some inaccurate excel template full of dubious data.
At QC Capital, we never want your wealth sitting idle. We want you to raise capital for historically profitable properties that diversify your portfolio while minimizing risks and maximizing returns. So let's do it. Consult our investment experts immediately.