Time to Invest in Real Estate?

If the prime directive of investing is to “buy low, sell high,” it must be time to invest in real estate, right?

Well, maybe. I think real estate bets fall into the category of things to do with money you can afford to lose. That’s why I don’t even mention real estate in my investing guide, which assumes you want stability in your investments to offset volatility in your business.

With the economy this shaky, there are lots of hazards hanging over commercial real state, where vacancy rates are rising and rents are dropping. And although many people have long thought of residential property — especially their own homes — as sure winners, this market has delivered nothing but shocks for the last two years. One of the causes of the financial crisis was the nearly universal belief that home prices could not fall nationwide. Well, guess what?

But with those warnings on record, how would you invest in real estate if you wanted to, either as a business venture or personal investment? Aside from buying individual properties, which can be awfully time-consuming for a small-business owner, there are several ways.

The newest twist is a pair of exchange-traded funds that started trading June 30, offering a unique opportunity to bet on price changes of ordinary homes. The MacroShares exchange-traded funds track changes in the S.&P./Case-Shiller Composite-10 Home Price Index, reflecting home prices in the 10 largest U.S. cities. (The Shiller in the name is Yale economics professor Robert J. Shiller, author of the best seller “Irrational Exuberance.”)

The index has become one of the most widely followed housing market gauges because it tracks price changes of the same homes over time, rather than looking at average sales prices in a region. Its latest data show prices fell 18 percent in the 12 months through the end of April.

The MacroShares Major Metro Housing Up E.T.F. (UMM) is designed to rise in value when the index goes up, to fall when the index goes down. The MacroShares Major Metro Housing Down E.T.F. (DMM) does the opposite, rising when the index falls and falling when the index rises. The investor can therefore use the Down fund to bet the housing downturn will continue, and the Up fund to bet on a rebound. In fact, the E.T.F.’s use leverage to try to triple the gains on index moves. You could even use the Down fund to hedge against loss should your own home fall in value.

These E.T.F.’s offer some obvious benefits over buying an investment property. You can essentially bet on the market nationwide, rather than a local market that may have quirks that make it run against the current. Plus, of course, you have no tenants to deal with and no unexpected repair bills, tax hikes or other headaches.

Most important, your money remains accessible. Since E.T.F.’s are traded like stocks, you can sell your shares with the click of a mouse and write checks against the proceeds in a few days. That could be especially appealing if your personal assets are a reserve for your business. (Want to talk about your investing experiences as a small-business owner? Click here.)

But these E.T.F.’s are very new, and it will take some time to determine whether they behave as intended. They do not actually own homes, instead putting investors’ money into Treasury securities and various cash holdings. Money is shifted from one fund to another to reflect changes in the index. Ideally, that means the Up fund will gain 10 percent as the Down fund loses 10 percent. But the funds’ prospectus warns this might not always be the case. If investors pile into one fund and flee the other, prices could be skewed by the imbalance in demand.

These funds might be fun to play with, but I would do no more than dip my toe. Among the other ways to bet on real estate without actually owning it:

Home builder’s stocks. Fortunes of companies like Toll Brothers (TOL) and Hovnanian Enterprises (HOV) rise and fall with the housing market, though not necessarily in lockstep.

To get a list of stocks for home builders and other real estate firms, key one of those ticker symbols into the Get Quotes box on the Times home page, then look at the Peer Performance data.

Real estate investment trusts and funds. REITs operate much like mutual funds that own properties. Typically, each specializes in a slice of the market — office buildings, malls, apartment buildings, shopping centers. There also are many mutual funds that invest in REITs, just as other mutual funds invest in individual stocks.

As a group, REITs just finished their best quarter ever, snapping back after investors concluded real estate may not be such a black hole after all. The Dow Jones Equity All REIT Total Return Index, tracking more than 100 REITs, gained nearly 29 percent in the quarter ended June 30. The index had plunged more than 30 percent in the previous quarter, after losing nearly 40 percent in last year’s fourth quarter.

The National Association of Real Estate Investment Trusts lists REITS on its site.

Mutual Funds. There are more than 200 mutual funds that invest in real estate with a wide range of strategies, from buying REITs to owning stocks of home builders and other types of firms. According to Lipper, the market data firm, real estate mutual funds returned nearly 30 percent in the second quarter.

But that group was still down nearly 44 percent in the year ending June 30, underscoring how risky real estate investments can be.

Other E.T.F.’s. Aside from the MacroShares E.T.F.’s discussed above, there are a number of E.T.F.’s tracking various real estate indexes. You can generate a list with the E.T.F. screening tool provided by Morningstar, the market data firm.

Where does real estate investing fit into the big picture? Some financial advisers think it helps provide diversification, since real estate prices can be driven by forces quite different from those governing stocks and bonds. Still, even the advisers who think real estate is worth having don’t give it a very big role in a long-term portfolio, generally less than 10 percent.

So I don’t think it’s a must-have for a retirement fund or other long-term goal. It’s been a very volatile market, making it suitable for people who want to make short-term bets — with money they can afford to lose.

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