How do I hedge myself in the real estate market

S

Sky123987

I'm going to get some cash & financing (line of credit currently @ 3.5%) and buy ~ $500,000 of real estate.

I'm going to fix and flip (3) properties and plan to make $25,000 on each of the properties if real estate stays where it is at.

When I buy the 3 properties I'll be $500,000 long in real estate which I really don't want. I'm thinking of shorting $500,000 of something that tracks the real estate market, therefore I then take the market out of play and just concentrate on the flip.

Can anyone recommend something I should short? Also is this a good idea?

I'd prefer to a future contract so I don't have to pay interest vs an ETF which i'll have to pay an interest rate. Though I'll be short and will be paid interest on the short position I'm betting the difference will be 1%. If I hold the properties for 6mo. That'll cost me $2500 to hedge myself!
 
Quote from Sky123987:

I'm going to get some cash & financing (line of credit currently @ 3.5%) and buy ~ $500,000 of real estate.

I'm going to fix and flip (3) properties and plan to make $25,000 on each of the properties if real estate stays where it is at.

When I buy the 3 properties I'll be $500,000 long in real estate which I really don't want. I'm thinking of shorting $500,000 of something that tracks the real estate market, therefore I then take the market out of play and just concentrate on the flip.

Can anyone recommend something I should short? Also is this a good idea?

I'd prefer to a future contract so I don't have to pay interest vs an ETF which i'll have to pay an interest rate. Though I'll be short and will be paid interest on the short position I'm betting the difference will be 1%. If I hold the properties for 6mo. That'll cost me $2500 to hedge myself!
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S&P Realestate futures
 
Quote from Sky123987:

I'm going to get some cash & financing (line of credit currently @ 3.5%) and buy ~ $500,000 of real estate.

I'm going to fix and flip (3) properties and plan to make $25,000 on each of the properties if real estate stays where it is at.

When I buy the 3 properties I'll be $500,000 long in real estate which I really don't want. I'm thinking of shorting $500,000 of something that tracks the real estate market, therefore I then take the market out of play and just concentrate on the flip.

Can anyone recommend something I should short? Also is this a good idea?

I'd prefer to a future contract so I don't have to pay interest vs an ETF which i'll have to pay an interest rate. Though I'll be short and will be paid interest on the short position I'm betting the difference will be 1%. If I hold the properties for 6mo. That'll cost me $2500 to hedge myself!
More...


Unless you are paying cash and plan on catastrophe, I don't see how you could lose $500,000. Like a futures contract you will put down 10% or risk $50,000. Now you have to assume what your capital gain /loss will be. Same as being long stock after x period what will your % gain/loss be. I would hedge this amount.

eg short $50,000 xhb @13.00

You can look at CaseSchiller index if you are in a large town like LA and New York. Correlation is a major problem with this hedge. If you are gonna hold this for income I would not worry that much. But if you going to sell you better be damn sure you are going to have a buyer in this market; know your marketing times and expense your mortgage and borrowing costs with worse case scenarios and see if the deal makes sense.



http://www.scribd.com/doc/2184680/Real-Estate-Investing-Profit-Analysis-Sheet


http://www.mortgageinvestment.com/Real_estate_and_mortgage_downloads/downloads.htm


http://www2.standardandpoors.com/po...s_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html
 
I wouldn't try to hedge RE w/ RE futures - matching is just too difficult so quite easy for you to lose on both ends. Recall futures anticipate future values ... you can get yourself in real trouble here. Also, last I looked the liquidity on RE futures was terrible, so you'll pay through the nose coming and going.

If I were to try this, I would first consider using interest rate futures, i.e. if rates go up, housing prices are definitely going down some more. Maybe buy some puts (pref. 1-4 yrs out) on the 10-year ... that's how I'd be approaching this.
 
Quote from BlueHorseshoe:

If I were to try this, I would first consider using interest rate futures, i.e. if rates go up, housing prices are definitely going down some more.
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So then, if rates go down, housing prices are definitely going up? If so, we have a workable hedge. I'm not seeing that. I'm seeing 'Texas'.
 
why are you going long RE in a down RE market that is also extremely illiquid.You aare betting a lot of capital for a 17.5% return...you should be doing some kind of pairs trade in equities...
 
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