REITs may be a good way to profit from a housing recovery

ByABC News
June 28, 2012, 7:43 PM

— -- Q: Are real estate investment trusts the best way to play a recovery of the housing market?

A: It may be tempting to run out and buy a house or apartment if you're betting the real estate market is on the mend.

Buying a house is the most familiar way that most investors or consumers have of buying real estate. But it's far from the only way, and in many ways, can be more of a hassle than it's worth. There are alternatives for investors who want a piece of real estate, without getting late-night calls to fix tenants' clogged sinks.

Whether the real estate market is actually mending is a matter of debate. Some investors were enthused by data this week from the S&P/Case-Shiller Home Price index and see signs of bottoming.

Data through April 2012 showed home prices rising after seven consecutive months of falling. But the index was still down 1.9% from a year earlier.

The rates of decrease have been moderating, which optimists say is a sign that now's the time to step in and buy houses at depressed prices. Meanwhile, mortgage rates continue to scrape along at historic lows, making property more affordable than it's been in years.

Speculating on home prices, though, can be pretty perilous. If you're planning to rent the property, you need to be just as tuned into the rental market, which is more closely tied to employment than mortgage rates. And the nation's unemployment picture remains very mixed.

If you bet wrong, you could get stuck with a physical property that must be maintained. Sitting on a property if the market turns against you could create a large financial burden if the local rents can't support your mortgage payments.

Given the risks, investors might be looking for alternatives to get a piece of real estate. Real estate investment trusts, or REITs, are a clear alternative.

There are some problems with substituting REITs for other forms of real property. The biggest issue is that most REITs own apartment buildings, office buildings and strip malls, not homes. These types of properties aren't typically the most sensitive to changes in real-estate prices.

If you're convinced the housing market is about to jump back, it's hard to beat buying a house or apartment building. But if you don't want to be an accidental landlord, and just want to have exposure to property value increases, it's hard to beat a less active investment such as REITs.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz