Welcome to Real Estate Investing 101 and 102Marc Roth
After the housing bubble nightmare, does it still make sense to invest in real estate?
That depends on whether you've done your homework. As I suggested in my last column, check the data and ask tough questions. If you have concluded (as I have) that residential real estate prices are heading higher, you could put yourself in a position to benefit.
In this column I want to help you understand the different ways you can put your money where your intellectual conclusions are (without risking your entire net worth). You have six straightforward options.
1. Buy a house. As I've repeatedly written, I think this is a great time to buy—whether you convert from renting to owning, or upsize to your dream home.
2. Buy an investment property, be it a single home you rent out or a two- or four-family dwelling.
3. If you are in the market for a high-end vacation home, there are tremendous deals out there right now. While certain high-end markets (think Vail or Aspen) have held up well during the recent downturns, most vacation areas have not fared as well and there are deep discounts to be had.
In the past, the article would have ended right here. There really wouldn't have been any other choices. But the world has changed substantially since many of us bought our first home, and the opportunities for the average person to invest in real estate have broadened dramatically. Let's explore three of them briefly.
4. You probably already know the basics of Real Estate Investment Trusts, or REITs. A REIT is a corporation that invests shareholder money in real estate and real estate development loans. REITs trade on the various stock exchanges just like stocks and they come in various flavors. Some invest in real estate of all kinds, others specialize and might focus only on residential properties or on an extremely narrow sector such as manufactured homes in central Florida. As always, the narrower the holdings the greater the risk. There are a lot of great Web sites to help you do some homework if REITs sound appealing. I suggest you start with someplace simple such as REIT.com.
5. Exchange-Traded Funds (ETFs) are mutual funds that track a specific index, sector, or specific slice of a sector, but trade like an individual stock. Not surprisingly, there are many real estate ETFs to choose from. That's the good news. The news to be wary of is you have to take a careful look at the holdings of each fund. Most ETFs claiming to be "residential," also have exposure to other types of real estate such as health-care facilities, self-storage, office, retail, and the like. Some may have exposure to real estate mortgages as well. Do your homework! A great place to start that research is ETFconnect.com.
6. If you are an experienced investor who has a definite opinion of which way you think real estate prices will go, ProShares offers the Ultra Real Estate ETF that "seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones U.S. Real Estate Index." There are also two new funds issued by MacroShares, which are designed to move at 300% of the daily changes in the price of the S&P Case/Shiller Composite-10 Home Price Index. The Major Metro Housing Fund rises when home prices do. The Major Metro Down Housing Fund goes up when prices fall. As you might have guessed, these funds are working with quite a bit of leverage to produce their returns. Obviously these funds are for the serious investor.
The net takeaway from all these options is clear: While I still think this is a great time for certain people to buy or trade up when it comes to homeownership, there are plenty of opportunities for everyone to take advantage of long-term real estate investment strategies—including opportunities for people who think I am all wet and real estate prices are heading lower.