The US residential real estate market traced an admirable upward trajectory since the 1960s. Owning a home is a time-honored method of building wealth, asserts Jackie Ann Patterson of Truth About ETF Rotation.
Collecting rent from residential or commercial real estate is often touted as the path to financial independence, however, owning real estate has its drawbacks. Property requires maintenance. Owners can offload that burden to property managers, but at a price. Down payments and reserves are not easy to come by. Taking profits can be a major upheaval, especially if you are living in your investment.
Online brokerages made investing in stocks, bonds, and ETFs simple and swift. Several financial instruments exist to put real estate within a couple clicks of your brokerage account.
Real Estate Investment Trusts (REITs) acquire a pool of income-producing properties and pass at least 90% of the profits directly to shareholders. Commercial office space, hotels, and apartment buildings readily come to mind when thinking of investment property, but REITs cover many themes including senior living, data centers, and cold storage. In addition, some stock tickers represent property-intense businesses such as ski resorts or cell-phone-tower operators, not to mention big franchisers such as fast-food restaurants.
Exchange Trade Funds (ETFs) track the components of stock indices. Various real estate indices exist covering global markets as well as the US. Perhaps the most popular real estate ETF, judging by average trading volume, is iShares U.S. Real Estate ETF (IYR). It tracks the Dow Jones US Real Estate index comprised of 83 companies. The diversification is astounding as each of those companies manages manifold parcels. If you would rather play the banker, iShares MBS Bond ETF (MBB) enables you to invest in a collection of mortgage-backed securities.
Typical benefits of buy-and-hold investing in real estate in your brokerage account include capital appreciation and income. Most of the Real Estate ETFs and REITs pay a dividend. The price of an actively traded security, which has its holdings regularly marked to market fluctuates more readily than a house in suburbia.
Since shares of REITs and real estate ETFs are made available for shorting, it is possible to use them to hedge a physical real estate position. For example, an individual who owned and rented out retail space could see the value drop due to current events. Selling short on a commercial office space REIT could offset the paper losses. One note of caution: Short sellers are responsible for paying the dividend on the shares they have borrowed, which adds to the cost to carry the position.
Almost any swing- or intermediate-term trading strategy could be applied to real-estate stocks and ETFs. For example, calculating moving averages to follow the trend, scanning for MACD divergences to indicate a trend change, or even the more frequent moves prescribed by an oscillator-type indicator are all valid possibilities for an active trader.
Drawbacks to investing in real estate in your brokerage account may include higher loan rates, less favorable tax treatment, and more price volatility.
If you’re wondering how to time an entry into real estate, you might consider the methods outlined in my book, Truth About ETF Rotation. It details a method of comparing stocks, bonds, and real estate to pick strong areas for intermediate-term investment.
To learn more about Jackie Ann Patterson visit her website here.