Real Estate Investing: Taking Advantage of Opportunities

Forward-thinking real estate investors are looking ahead to opportunities that should come with a broader real estate recovery.

Economic calamities are painful. But they do set the stage for recovery, and that's when the most lucrative investing opportunities can arise.

Analysts are waiting to see how today's ultra-low mortgage rates and housing prices will impact housing activity going forward. Unfortunately, economic data doesn't conclusively indicate that a housing recovery is yet underway. Housing starts jumped in February, but the increase was concentrated in traditionally volatile multi-family complexes. Sales and housing prices have shown some regional stability-but it's too early to tell if those are developing trends or just isolated blips.

Given this short-term uncertainty, real estate investors will likely only jump in if they're able to stick with the investment for the long term.

Going direct

Real estate investors can benefit from the eventual recovery in different ways. The most direct approach is through the purchase of investment property. The trends in mortgage rates and housing prices make this strategy far more affordable than it was, say, four years ago. The primary obstacles are first, obtaining financing, and second, qualifying renters that aren't at high risk for job loss.

The federal government's efforts to reduce market mortgage rates will create revenue opportunities for banks with mortgage lending units. Thus far, refinances have picked up while purchase mortgages are still relatively flat. Even so, mortgage lending banks like Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), SunTrust (NYSE: STI) and Bank of America (NYSE: BAC) can add stability to their operations with increased refinancing activity.  Incidentally, when Wells Fargo announced record first quarter performance on April 9, the company listed "strong mortgage banking results" as one contributing factor.

Instant diversity

Real estate investors could also take a pre-diversified position in real estate funds. The iShares Dow Jones U.S. Real Estate (IYR) ETF, for example, seeks to track the performance of the Dow Jones U.S. Real Estate Index. It's a mixed bag, however, because the index is heavily exposed to commercial real estate. There's uncertainty, however, about the near-term prospects for commercial property.  With consumer spending failing to ramp up, and commercial lending still tight, businesses are still having trouble keeping the doors open. Increasing business failures would cut off rental income and possibly depress commercial property values by creating oversupply.  

Other funds specialize in residential property. Equity Residential (NYSE: EQR) and UDR, Inc. (NYSE: UDR), for example, own and manage apartment complexes. Long term, rentals can benefit from higher home prices, as long as mortgage lending standards don't loosen up.

Home builder stocks are another long-term option to consider. ETFs like XHB track the S&P Homebuilders Index and include holdings like D.R. Horton (NYSE: DHI) and Pulte Homes (NYSE: PHM).

Because the timing of recoveries is unpredictable, real estate isn't a suitable sector for investors who need fast profits. Like almost everything else right now, it's a long-term play-one that requires a hearty tolerance for risk.