What is Jesus saying in this passage?
The Greek word for “again” (John 3:7) is the same one used in John 3:3 above that means "from above". Jesus is distinguishing between our physical birth - "That which is born of the flesh is flesh" (John 3:6) - and the spiritual birth - "that which is born of the Spirit is spirit" (John 3:6) - required for us to "enter the kingdom of God." (John 3:5)
Why is "Spirit" (John 3:5) capitalized?
Jesus is referring to God the Holy "Spirit", the enabler of the spiritual birth.
Is the "Spirit" then a different God?
No, God the Holy Spirit, along with God the Father and God the Son (Jesus) comprise one God, and Jesus affirmed this in Mark 12:29 by declaring, "the LORD is one." But the Bible also clearly describes three distinct personhoods for God the Father, God the Son and God the Holy Spirit. This notion, commonly labeled, "Trinity" is one that is tough for us to grasp. Just bear in mind that since God is God and created the universe, there will be some things about His truth that we mere humans won't fully understand, at least not while here on earth.
But is the Holy Spirit someone who can really be said to have a 'personhood'?
Yes, Acts 13:2 says that he speaks: "As they ministered to the Lord and fasted, the Holy Spirit said, 'Now separate to Me Barnabas and Saul for the work to which I have called them.'"
Can the "Spirit" be seen?
No, but neither can wind, yet you know of its existence, as Jesus says in John 3:8 above.
What is the "water" of which John 3:5 says one also needs to be born to enter the kingdom of God?
Jesus is talking about the "living water" in the next chapter (John 4:7-14).
What is this "living water"?
It's the salvation through Jesus Himself, whom John 1:1 also calls the "Word". To enter the Kingdom of God, we need to have Jesus, to know about Him, and to know Him through the Word.
Is there a more direct equation between "water" and the "word" in the Bible?
Yes, Ephesians 5:25-26 says, "Husbands, love your wives, just as Christ loved the church and gave himself up for her to make her holy, cleansing her by the washing with water through the word." Also, 1 Peter 1:22-23 adds, "Since you have purified your souls in obeying the truth through the Spirit in sincere love of the brethren, love one another fervently with a pure heart, having been born again, not of corruptible seed but incorruptible, through the word of God which lives and abides forever."
And who enables us to do that?
The "Spirit", as Jesus says in the passage above.