12FINANCING OF REAL ESTATE
Investment in real estate requires significant capital. Investors therefore often look outside their own firms to the capital market to raise the funds to invest in these assets. Even investors who have the funds available might not want to put up the whole amount but prefer to use leverage. The two most common ways investors can fund the purchase of real estate are equity and debt financing.
Equity investment includes the investor's own capital and capital from other investors in the purchase of the real estate. The investors could be individual investors, partnerships of individuals or corporations, investments clubs, private equity funds, hedge funds, investment banks, commercial banks, and pension funds, among others. In an equity investment funding structure the investors share the risks and rewards of the real estate investment. The return for these investors would include periodic cash flows from the investment and gains upon disposal of the assets.
The focus of this chapter is debt financing of real estate. Debt financing can be obtained through numerous sources. Eight of the most common lenders are:
- Commercial banks
- Investment banks
- Mortgage banks
- Credit unions
- Pension funds
- Life insurance firms
- Savings and loan associations
- Mortgage real estate investment trusts
Commercial banks usually are chartered by the federal or state governments in which the banks operate. Real estate financing is one ...
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