How Well Do You Know Real Estate? Time to Find Out!
Real estate is an important component of the U.S. and global economies. For many Americans, homeownership doubles as a first investment. Beyond a primary residence, investors also can buy into the commercial real-estate market: Office buildings, multifamily housing, hospitals, parking lots, storage facilities, retail properties, call centers, distribution hubs, hotels and restaurants form a sector with its own economic ups and downs.
In 2016, the S&P 500 recognized real estate as its own sector, separating it from financial services where it had been buried for years—a move some view as a portent of more real-estate investment to come and that others view with indifference. Currently, real estate accounts for less than 5% of the S&P 500 by market cap.
How much do you know about real estate—and real-estate investing? Let’s start with a few basics (but we assure you, they will get harder).
1. How do investors participate in the real-estate sector?
A. Mutual funds and ETFs
C. As direct owners/landlords
D. All of the above
ANSWER: D. Many investors inadvertently own real estate. Broad-themed mutual funds typically allocate a portion of their holdings to real estate. They own it directly, too, sometimes in the form of an exchange-traded fund. You can buy stock in home builders or REITs. You also can buy investment properties for income, and in some cases you can carry these properties within an IRA. Some argue that owning a primary home makes the average investor “overweight” in real estate, so portfolio allocations to real estate need not comprise a large percentage of holdings.
2. What is a REIT?
A. Real-estate investment trust
B. Real-estate investment tax
C. Real-estate insurance tariff
D. Real-estate investor trade
ANSWER: A. Real-estate investment trusts are investment vehicles that contain securitized portfolios of commercial properties such as office buildings, apartment buildings, retail sites, hotels, storage facilities, parking garages, data centers, even cannabis farms. You can buy shares (typically called units) in a REIT, or invest in REITs indirectly since REIT units are often found within mutual-fund portfolios or inside target-date funds.
3. True or false: Real estate is a countercyclical sector.
ANSWER: It depends. Real estate’s fortunes usually rise in a bullish economy, since indicators such as high employment and a strong regional economy can push up demand and prices for housing, office space, storage, retail and other categories of real estate. But some financial advisers and fund managers consider real estate “countercyclical” since it can zig when the rest of the economy zags. For example, even in a slow economy, consumers still need housing (they may opt to rent an apartment from a REIT, rather than buy a new home) and will continue to shop at retail outlets, pay for parking garages and storage facilities, etc.