Real estate finance explained. Invest in REITs (like stocks in real estate) for diversification and income, but understand the pros and cons. Consider a Master in Finance to specialize in real estate finance.

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Having expertise in financial management and investment is crucial to making informed decisions in real estate development. IE University’s innovative Master in Finance gives you the opportunity to focus on real estate finance and alternative investments, through a dedicated specialization track. Find out how you can apply your financial skills to the world of real estate investment and real estate financial markets.

What is real estate finance?

Real estate finance is a branch of finance which focuses on the purchase of real estate. This could be a residential property, a commercial building or a plot of land. It involves the analysis, planning and management of financial resources related to real estate, commercial loans and properties. Real estate finance also covers financial processes such as the acquisition, development, construction and operation of commercial and residential properties.

Investment in real estate can be undertaken in various ways. This includes homeownership, investing in rental properties and “house flipping,” where an investor purchases a property with the sole intention of selling it for a profit. Here, we’ll be focusing on a specific method of investment: real estate investment trusts (REITs).

What is a REIT?

A REIT is a company which owns, operates or finances income-producing properties. These  may include apartment buildings, data centers, hotels, medical facilities, offices, retail outlets and warehouses. REITs are publicly traded like stocks, so they are highly liquid, unlike other real estate investments. Investors don’t individually buy, manage or finance any properties.

REITs were established by the US Congress in 1960, but there are other established REIT markets worldwide. There are also different types of REITs, and each specializes in distinct areas of real estate such as retail, healthcare and mortgages. It’s important to understand the full implications and the pros and cons of investing in a REIT before investing. This is where your financial expertise comes into play.

Different Types of REITs (Equity REITs, Mortgage REITs, Hybrid REITs)

Real Estate Investment Trusts (REITs) are essential investment vehicles for real estate investors wanting to diversify their portfolio. There are three main types of REITs that investors can choose from, each with its unique characteristics and benefits.

Equity REITs primarily invest in and own types of real estate such as commercial real estate and residential real estate, generating revenue from rental income and lease agreements.

On the other hand, Mortgage REITs lend money to real estate investors and real estate agents, earning their income from the interest rate on the transaction. Hybrid REITs combine the strategies of both Equity REITs and Mortgage REITs, providing a diversified approach to real estate investing.

When considering investing in REITs, it is crucial to evaluate factors such as cash flow and investment returns, and leverage them to make informed investment decisions.

By modeling the capitalization rate and net operating income (NOI), investors can project the future value of clients’ real estate assets accurately. For instance, if an investor acquires a single-family property, they can estimate the net operating income and potential investment returns via financial analysis.

Pros and Cons of Investing in REITs

REITs can be a valuable addition to an investor’s portfolio, offering a unique way to invest in the real estate market without actually owning physical properties.

One of the main advantages of investing in REITs is the potential for tax benefits, as they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. Additionally, by investing in a diversified portfolio of properties, individual investors can benefit from value-based investing without having to purchase a home or obtain a real estate license.

However, there are also some downsides to consider. For instance, the value of REIT shares can be affected by factors such as fluctuations in home prices and property taxes, as well as changes in capital expenditures and equity capital.

Furthermore, investing in REITs requires a good understanding of financial modeling and valuation techniques, which may be challenging for those without expertise in real estate. Real estate professionals play a crucial role in overseeing and managing REIT properties, using their leadership skills and professional development to ensure profitability.

When considering financing options for commercial mortgage and debt and equity financing, it is important to understand the basics and stay up-to-date on the latest trends in the real estate market.

Overall, investing in REITs can provide a valuable source of income and diversification for investors, but it is important to weigh up the pros and cons carefully before making any investment decisions.

Getting a foot in the door for a career in real estate finance

Adding real estate expertise to your financial knowledge has several advantages. Bricks and mortar are a stable feature of our fast-changing world, so you’re assured a future-proof career. According to Jaime Riera Mancha, EMEA Head of M&A and Corporate Advisory for JLL, the continuing growth of the real estate sector means that top professionals are in high demand:

In recent years, real estate has become an increasingly institutional asset class, attracting a significant volume of new capital and prominent institutional investors. Real estate financial markets have continued to grow, with numerous public and private capital markets transactions (IPOs, private equity raises, bond issuances, JVs, etc.) as well as high levels of M&A and indirect investments. This activity is a result of numerous new corporates, asset managers, private equity, pension funds and sovereign funds which seek to increase their exposure to this sector. These market participants are constantly seeking talented professionals who combine a solid financial background with an understanding of the underlying property assets.

A number of career opportunities are open for graduates of the Master in Finance with a specialization in the Real Estate Finance & Alternative Investments track. With the right qualifications under your belt, you could be earning a very attractive salary.

Top real estate finance roles for professionals with your skills include investor relations manager, financial analyst, asset manager and many more.

Real estate finance and what you need to know about REITs

Master in Finance alumi Salena Lee is a prime example of how the Master in Finance can take your career in a new direction. Salena previously worked in foreign direct investment in the political arena. However, she decided to make a move into real estate, served as Vice President of real estate at Credit Suisse Madrid, and is now Director M&A and Investment Banking, JLL.

Salena credits the program with transforming her career. “I was ready for a rigorous academic challenge, and this was what I received from the finance program,” she explains.

Break into real estate investment with the Master in Finance

If you’re looking to make a move into the demanding yet rewarding world of real estate finance, IE Business School’s top-ranked Master in Finance could be your next step. We understand that education isn’t just about earning a degree: it’s a transformative experience, and every individual’s journey is unique. That’s why we designed the Master in Finance to give you the opportunity to specialize according to your strengths and career objectives.

It’s an intensive, one-year program that you can tailor to suit your professional goals through four different tracks. Each will open the door to a career-boosting specialization. Industry experts teach on the program, helping you curate a future-proof career path and discover how you can make an impact.

Real estate finance and what you need to know about REITs

If you choose the Real Estate Finance & Alternative Investments track, you’ll gain the skills to understand the basis of the main alternative investments such as Real Estate Investments, Venture Capital and Commodities.

You’ll also learn how to deal with and manage them as an asset class. This track gives you a comprehensive overview of the following topics:

  • Real estate investment
  • Real estate financial markets
  • Venture capital
  • Commodities
  • Alternative investments as an asset class