What is Real Estate Finance?

Whether you're looking to purchase a home or invest in commercial properties, understanding the basics of real estate finance is essential for success. An exciting, challenging line of business, real estate finance involves the analysis, planning and management of financial resources related to commercial and residential loans and properties. This post provides an overview of several key topics and concepts, from valuation methods to careers in real estate finance.

Real estate finance is a branch of finance that focuses on how people purchase real estate, whether that be a home, an office building or a plot of land.¹ This area of finance involves the analysis, planning and management of financial resources related to real estate, commercial loans and properties. It also includes financial processes around real estate, such as acquisition, development, construction and operation of commercial and residential properties.

As you can see, this is a broad area of finance. To dig a bit deeper, let’s explore the different types of real estate and the types of real estate finance roles that finance professionals may wish to pursue.

Commercial and residential properties are two main types of real estate. While both types of properties share some similarities, there are also significant differences between them that make them distinct from one another.

Commercial real estate refers to properties that are primarily used for business purposes.² This includes office buildings, retail spaces, warehouses, industrial buildings and land zoned for commercial use. Commercial properties are often owned by businesses, or real estate agents, investors or developers who lease or rent the property to tenants.²

Commercial properties can be valued in a number of ways, including the capitalization rate, Gross Rent Multiplier (GRM), sales comparisons (comps), replacement rates or the market.³ Of these methods, the capitalization rate, or the value based on the property’s potential to generate income, is popularly used for valuation.³ In this method, the value is determined by the net operating income (NOI), which is the property’s annual income minus its expenses.⁴ The higher the NOI, the more valuable the property is considered to be.

Commercial properties require a significant investment upfront, as they are often more expensive than residential properties. Commercial real estate investors and developers often need to borrow money or secure real estate financing to purchase or develop commercial properties.

Residential real estate refers to properties that are used for living purposes, such as single-family homes, apartments, condos and townhouses.⁵ Residential properties are typically owned by individuals or families who either live in the property or rent it out to tenants.

Residential properties are valued through three main types of valuation, including fair market value, appraised value and assessed value.⁶ Each valuation type is tied to a different function. For example, fair market value is used to price a home to prospective buyers. It looks at factors like location, size, amenities and the condition of the property in comparison to similar homes in the same area.⁵ The appraised value must be calculated by a licensed appraiser and is typically used for borrowing to purchase a home or when refinancing a home. The assessed value is determined by the local county tax assessor in order to collect the appropriate amount of property taxes.

Residential properties are generally less expensive than commercial properties, making them more accessible to individual investors. However, a person’s finances and real estate financing options will determine whether they choose to own a home or rent. The average person likely will not be well-versed on the ins and outs of the home buying process, which means they turn to trained real estate finance professionals to help.

Real estate finance professionals play an important role in helping both individuals and businesses obtain loans or other forms of real estate financing from banks, mortgage lenders or other financial institutions. To pursue a career in this field, a degree in finance, real estate or a related field is typically required, along with relevant experience and industry certifications.

To find success in real estate finance, professionals typically need skills in the following areas:⁷

• Financial modeling
• Valuation and underwriting
• Understanding of capital markets
• Real estate market analytics

Let’s take a look at several of the roles available in real estate finance.

A real estate analyst provides financial analysis for investment opportunities, evaluating the potential risks and returns of a project or property.⁸ They gather data and create financial models to help guide investment decisions based on market trends and economic conditions.

Mortgage underwriters assess loan applications to determine if borrowers qualify for a mortgage. They review financial documents and credit histories on behalf of financial institutions, such as banks and credit unions, to evaluate the borrower’s ability to repay the loan.⁹

A real estate investment analyst prepares underwriting of properties using projections, market research and financial statements.¹⁰ Using this data, they assess risks in order to make recommendations to potential investors.

Real estate appraisers play an important role in assessing the value of properties for sale, purchase or refinancing purposes.¹¹ They analyze market trends and use various methods to determine a property’s value, requiring that they stay up to date on current standards in the field, real estate laws, tax benefits and more.

A mortgage loan officer assists clients in obtaining loans for real estate purchases or refinancing their loans.¹² They evaluate the client’s financial history and creditworthiness to determine the loan amount and interest rate a buyer will receive from a lender.

A real estate investment banker advises clients—typically entire companies— on mergers and acquisitions, debt and equity financing and other financial transactions related to real estate investments.¹³

A real estate asset manager manages and maximizes the value of a portfolio of properties on behalf of an investor or company.¹⁴ They develop strategies to increase revenue and reduce costs, monitor performance and oversee property maintenance and improvements.

With William and Mary’s Online Master of Science in Finance (MSF) program, you’ll become fluent in principled value creation, financial modeling, analysis and decision-making, global financial strategy, effective communication of complex financial information and much more. The Online MSF program prepares future CFOs with Get the quantitative and leadership skills necessary to ascend to the c-suite.

The Online MSF is designed for working professionals and features a comprehensive curriculum that will hone your competitive edge in many business areas, from corporate finance to financial planning and beyond.

Take a deeper dive in real estate with two courses focused on real estate finance and investment. In your real estate finance course, you will learn about a wide range of real estate topics, from understanding the home buying process to programming complex mortgages. In your course on real estate investments, you will improve your understanding of the real estate asset class.

To get started, reach out to one of our admissions outreach advisors today.