Real Estate Finance. An Overview

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Real estate finance provides financing for the purchase of property, which is an essential component for the construction or rehabilitation of buildings. In the banking sector there is distinction between private real estate financing and real estate financing.

A private real estate financing provides finance for residential properties, private equity real estate can obtain debt such as bank loans. Private loans for real estate are generally secured by a mortgage, usually in the form of a mortgage book.

In the early days until the seventies real estate finance was almost exclusively offered directly by banks and building societies, the sale of real estate loans is nowadays through various distribution channels.

The private real estate financing comes with the lowest bad debt, since the loans are secured through a mortgage. However, in the event of liquidation of collateral under some circumstances recourse will still be achieved from the sale or foreclosure of the property.

The debt paid as shares in private real estate is repayable, over a fixed period in the form of interest and principal. The funds flow directly into the loan repayment and reduce the interest burden in the course of the repayment period.

Given the close interdependence of the private real estate with the acquisition or construction of homes, real estate constitutes a considerable economic importance. The context of private real estate has a direct impact on employment intensive construction and performance of residential real estate.

A real estate purchase and the associated financing represent transactions in which funds are moved, typically representing a multiple of annual earnings for the private real estate buyers. For this reason, the legislature has created here a variety of consumer protection rules.

The commercial real estate includes the financing of commercial properties or residential properties used, and is pertinent to business assets. The financing of office and retail real estate is much more complex than the private residential property or commercial real estate financing.

The assessment of long-term letting of the property, managing current tenants and the lease requires special expertise. In this respect, particularly  reserving such expertise for specific niche property areas.

In some countries, for self occupied property, the financing costs are not tax deductible. The tax treatment of real estate can depend on the usage of the property. In some instances, a loan cancellation is only possible at a deficit rate of 2.5% of the loan.

The major owner of commercial residential properties are housing companies, they dominate local, mostly urban societies and housing cooperatives in the market. Few for profit larger companies operate in this market in some countries. These housing companies usually have a substantial capital base and positive cash flow from a portfolio of residential properties.

 

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