The real estate market has been on the upswing for a while now. Home prices have steadily increased, and interest in buying and investing in property has grown.
But when it comes to real estate investment trusts (REITs) many may wonder: Can you short REITs? Let’s find out.
Can You Short REITs (and The Housing Market)?
As the housing market continues to rebound, more and more real estate investors are asking themselves if they can short REITs. After all, if prices are rising, surely there must be a way to profit by betting against it.
The answer is yes, you can definitely short REITs, and while there are different ways to short REITS, they come with a high degree of risk and are not suitable for everyone.
To understand how you can short REITs, it’s important first to understand what shorting is and how it works.
Shorting is basically when you sell a security you do not own and hope to buy it back at a lower price so you can pocket the difference.
For example, let’s say you think the price of XYZ stock from a publicly traded company will fall from $100 to $90.
You could short that stock by selling it at $100 and then buying it back at $90, making a profit of $10.
How to Short a REIT
If you’re looking to take advantage of declining housing market prices in the real estate sector, one way to do it is by shorting a REIT.
Shorting a REIT allows you to profit from falling house prices, but it also comes with the risk of losses if the market price rises.
There are three main ways to short a REIT: shorting individual real estate stocks, real estate exchange-traded fund (ETF), and holding a long position on an inverse ETF.
Shorting Individual Real Estate Stocks
If you’re looking to short a REIT, the simplest way to do it is by selling shares of an individual stock.
This can be done through a broker that supports short selling. Once you’ve located a suitable candidate, you’ll need to place a sell order and specify that you’re willing to accept less than the current market price per share.
If your order is executed, you’ll have sold the stock and established a short position. Your profit or loss will depend on how the stock price changes over time. If the price falls, you’ll make money; if it rises, you’ll lose money.
Shorting a Real Estate Exchange-Traded Fund (ETF)
Like other types of ETFs, REIT ETFs offer diversified exposure to the real estate market with the added benefit of trading on an exchange like a stock.
REIT ETFs can provide a convenient and cost-effective way to be included in the real estate market without buying or managing an actual property.
Holding a Long Position on Inverse ETFs
An inverse ETF is an exchange-traded fund that tracks the opposite performance of a particular real estate index or benchmark.
If an ETF tracks the S&P 500 Index, an inverse ETF would attempt to provide the opposite return of the S&P 500.
Inverse ETFs can be used to hedge against market declines or to profit from falling markets.
To hold a long position on an inverse ETF, you would need to purchase the ETF shares when it is trading at a lower price than its current value. You can use stop-loss orders to limit your losses and minimize your risks.
Should You Short REITs?
Shorting REITs can be a great investment, but they can also be a risky one. It really depends on your specific situation and investment goals.
When it comes to the housing market, there’s always a lot of talk about whether or not we’re heading for another crash like the one that happened in 2008.
But even though home sales have been declining lately, most experts agree that a national housing market crash is unlikely to happen.
However, that doesn’t mean that a downturn isn’t possible. In fact, a slowdown is more likely to occur than an all-out crash. It could result in either a slowing of home price increase as fewer individuals will be attracted to purchasing homes.
Risks of Shorting REITs
While shorting REITs may seem tempting to profit from a potential slowdown in the housing market, risks are involved.
One of the main risks is that adverse market movement. If the REIT’s share price unexpectedly rises, you could be forced to buy back the shares at a higher price than you sold them for, resulting in a loss.
Another risk to consider is the possibility of a “short squeeze.” This occurs when there is high demand for a particular stock, and as a result, the price starts to increase rapidly.
If you are shorting the stock, this could mean that you are forced to buy back the shares at an inflated price, again leading to losses.
Now, it is worth remembering that REITs can be volatile and unpredictable. They can experience sharp price movements in either direction, making it difficult to predict their future direction.
Final Words
It is important to remember that when you short a REIT, you are essentially betting against the success of the investment. This means that if the REIT does well, you will lose money on your investment.
On the other hand, if the REIT does poorly, you could stand to make a profit. Shorting REITs is not for everyone, and it’s important to carefully consider risks before taking this type of position.
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