Real estate as an investing tool

A perspective from E*TRADE Securities 08/14/20

Real estate, like every other part of the economy, has been turned upside down by the pandemic, as home and office status quos contort to emerging realities. Case in point: The housing boom that has resulted from the mass exodus of city dwellers flocking to suburbia.

Intrepid investors may be looking for ways to capitalize off these shifting dynamics. But for those of us uninterested in becoming the next star of Flipping Out, or picking up a side gig as a landlord, there are far easier ways to gain exposure to the real estate market—all from the comfort of your home (because where else are you going these days?).

In fact, there are several paths to invest in the real estate sector without buying physical property.

Real estate stocks

First, let’s start with stocks closely tied to the real estate market, such as homebuilders, real estate developers, listing agencies, and home-improvement companies.

Some of these stocks have gotten a boost lately thanks in part to a red-hot housing market. In the midst of a global pandemic, it turns out, people are looking for more space, and with record-low mortgage rates and tight supply, potential buyers have driven home sales—and prices—up.1

Homebuilders have been one of the primary beneficiaries of the recent housing frenzy, helping lead the market higher after its March low and pushing the S&P homebuilder index to its highest level in 15 years on August 10.2 And while some analysts think the industry may be running out of steam, others think there could still be room to run if interest rates remain low and the labor market continues to recover, providing more job stability for consumers seeking homes. 

Source: S&P Dow Jones Indices LLC


Real estate investment trusts

Next, let’s talk real estate investment trusts (REITs), which are the companies that actually make up the real estate sector of the S&P 500®. REITs own or operate large-scale properties such as office buildings, malls, apartments, hospitals, storage facilities, warehouses, data centers—you name it. The most common type of REITs are equity REITs, which are similar to a landlord in that they manage and lease properties and collect rent as their main source of income. 

There are more than 225 REITs traded on US stock exchanges3 (including 30 in the S&P 500), meaning investors can buy and sell shares of these publicly traded companies just as they would other stocks. 

REITs are required by law to pay at least 90% of their annual income to shareholders as dividends, making them historically some of the highest-yielding equities and a relatively stable source of income (also a classic inflation hedge).

Real estate ETFs and mutual funds

Finally, investors can gain exposure to the real estate sector via exchange-traded funds (ETFs) and mutual funds. Most real estate funds hold a variety of REIT shares, but there are some adjacent choices that include companies spanning home improvement, building products, household items, homebuilders, and home furnishings.

E*TRADE offers screeners and tools that can help investors quickly focus in on the funds they’re looking for, including the All-Star List of ETFs and mutual funds, and a resource dedicated to exploring real estate as an investing theme.

Real estate and the coronavirus pandemic

Depending on where you look, the outlook can vary wildly. Office real estate, for instance, could see a drop-off in demand if more companies keep workers at home permanently and shrink their corporate footprints. Retail landlords have struggled to collect rent from tenants that were shuttered during the lockdown, many of which were barely keeping their brick-and-mortar stores afloat in the age of ecommerce. Retail bankruptcies could threaten some REIT dividends if property owners aren’t able to recoup income.

On the other side of the coin, some areas of the real estate market (and related industries) may be poised to capitalize on the new pandemic-era economy. Companies that own or manage cell towers, warehouses, and distribution centers may benefit as businesses swap store fronts for fulfillment centers and beef up digital infrastructure.

Also, consumers content with spending more time at home may lend staying power to some “stay-at-home” names like home improvement and home furnishing stocks, many of which have seen surging sales thanks to new DIYers.

Then there is the possibility that a vaccine hits the market and boosts the speed of recovery, which in turn could mean that traditional real estate players hit hardest by the economic downturn (think retail, apartments, and office owners) may rebound.

Investing considerations

The investing tools discussed provide the opportunity for individuals to get into the real estate market without buying property outright, thus offering a potentially lower-cost entry point without the “sweat equity” that goes into managing a property and dealing with tenants (or buying a home and flipping it). 

Also, these vehicles are far more liquid than physical property. Since stocks, REITs, ETFs, and mutual funds are bought and sold on a stock exchange, getting into and out of a position is generally easier (and cheaper) than buying or selling a piece of real estate.

As always, remember to keep investing decisions aligned with long-term goals, individual timelines, and risk tolerance.

  1. CNBC, “Pending home sales surge for the second consecutive month as the Realtors raise their forecast for 2020,” 7/29/20, https://www.cnbc.com/2020/07/29/pending-home-sales-surge-for-the-second-consecutive-month.html
  2. The Wall Street Journal, “Home-Building Stock Index Reaches First Record in 15 Years,” 8/10/20, https://www.wsj.com/articles/home-building-stock-index-heads-for-first-record-in-15-years-11597090640
  3. National Association of Real Estate Investment Trusts (Nareit)

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