In 1950, the world population was at 2.5 billion. The global GDP then was at about $6 trillion. Today, the population has grown to more than 7 billion and the global GDP has grown to almost $80 trillion. In addition, more people have moved to urban centres. This has made housing one of the biggest challenges facing most cities. In fact, a recent report by McKinsey found that more than 1.6 billion urban dwellers will struggle to find decent housing by 2025.

These challenges have created opportunities for people who want to invest in the real estate sector. The biggest challenge faced by people who want to participate in the sector is the high cost of investment. The cost of buying land, paying contractors and the building materials coupled with the long waiting periods for government approvals is often discouraging to many people. In addition, it takes months to build a house.

After building a house – residential or commercial - there are two main ways of generating a return on investment. You can either sell the house to a customer or lease it. After selling the house, you can invest the money in real estate or in other asset classes. If you lease or rent it, you will receive a payout from the tenants at an agreed date.

There are 2 ways of generating a return on investment in real estate: selling and leasing.

When you lease, it will take you more time to recoup your investment. The benefit of leasing is that it gives you regular cash flow in perpetuity. Also, as the landlord, you retain ownership of the building and land beneath it. This means that if an opportunity arises, you can sell the house and the land for a good return.

Another alternative to real estate investing is using the financial market to invest in already-built houses. There are many real estate companies that are listed in the major exchanges around the world. These companies are divided into a number of categories such as:

  • Real estate investment trusts (REITs): these are companies that buy or build houses and generate income through rents. Examples of these companies are Ventas, Equinix, and Avalonbay among others.

  • Real estate builders: these are companies that build residential and commercial properties on behalf of real estate companies. Examples of these are KMB Homes, Pulte Group and Lennar Corp.

  • Real estate brokerage: these are companies that sell houses on behalf of their clients. These clients are the real estate developers. Examples of such companies are Zillow, Realtor.com. and Coldwell Banker among others.

  • Real estate development companies: these are companies that build commercial and residential real estate properties. Examples of these are Related Companies, Hines, and CBRE Group among others.

  • Real estate technology companies: these are companies that provide platforms that are used by real estate companies to improve sales. Examples of such companies are RealPage and Entrata among others.

Other than investing in the public companies, it is also possible for you to invest in real estate alternative market. A relatively new way to do this is by becoming an accredited investor and then using online platforms that allow people to pool resources together. This helps you to invest as little as $500 in real estate. Some of the companies offering these services are Fundraise and PeerStreet.

What influences real estate prices

When deciding whether you want to invest in real estate, it is important to first understand what moves the prices of houses. Understanding these issues will help you when you want to build a real estate or even invest in the listed houses.

Like in all assets, the most important influencer is demand and supply. When there is more demand for houses, the price tends to move up. When the demand falls and the supplies remain unchanged, the prices tend to fall.

There are a number of factors that influence the demand for real estate. They are:

  • Cost of credit: when interest rates are low, people tend to buy more real estate. This is because the cost to borrow and pay money is usually low.

  • Economic growth: when the economy is growing, the demand rises. This is mostly because more people move into employment. Companies as well expand to cope with the demand.

  • Location: real estate located near city centres is often more expensive than those located in the suburbs.

  • Speculation: in 2017, Amazon started the search for its second headquarters. When the list of states likely to host the company emerged, the prices of real estate started moving up. This is as builders started to anticipate demand.

  • Demographics: when China announced the end of the two-child policy, the price of houses started to move up as builders anticipated increased demand.

  • Urbanization: as more people move to urban centres, it creates increased demand for houses.

Other than demand and supply, there are other factors that influence the prices of real estate. These factors are:

  • Commodity prices: when prices of commodities like lumber, copper, and steel rise, the price of real estate rises too.

  • Taxes: When a government increases taxes on inputs and corporates, this cost is usually transferred to the customers.

  • Government subsidies: When a government removes a subsidy, this cost is in turn transferred to the customers.

Using financial instruments to invest in real estate

As mentioned above, it is possible to invest in real estate without the need for buying or building houses. This is because there are many financial instruments that exist to help in this. Some of these instruments are:

  • Stocks: this is a financial security that represents ownership of a company. These stocks are usually listed in major exchanges such as New York Stocks Exchange (NYSE) and London Stocks Exchange (LSE). Examples of public real estate companies are Lennar and Simon Property Group.

  • Bonds: this is when a company borrows money from investors at a fixed interest rate and maturity. The loaned money must be returned at maturity.

  • Exchange Traded Funds (ETFs): An ETF is a security created by combining a number of companies to form a fund. This fund is then actively traded. In the real estate industry, there are hundreds of ETFs with the biggest one being Vanguard Real Estate Index Fund which has assets worth almost $30 billion.

  • Index fund: an index is similar to ETFs. An index tracks the performance of a certain sector. For example, the S&P 500 Real Estate index tracks the performance of the public real estate companies listed in the US.

  • Contracts for difference (CFD): a CFD is a contract between a broker and a trader. It allows the latter to buy or short securities without owning the underlying asset. For example, if the stock price of Simon Property Group is trading at $10 and the investor can buy the CFD at the same price. CFDs are ideal to many people who can’t buy the underlying security because of the regulations.

  • Commodities: commodities like lumber and zinc are important indicators of the real estate industry. This is because most of their uses is in the construction industry.

How to invest in real estate CFDs

If you are interested in real estate CFDs, there are a few things you need to do.

First, you should find a broker who offers these CFDs. The broker should be regulated by the top regulators. Using a regulated broker is essential in helping you avoid online scams.

Second, you need to have a good understanding of how the real estate industry works. In this, you need to understand the key players and the ongoing trends in the industry. For example, the rise of e-commerce has led to the ‘death’ of many commercial malls. At the same time, the trend of shared offices has disrupted the office industry. Knowing these trends will help you find the best companies to invest in and those to short.

Third, you need to understand the concept of technical analysis. This is especially more important if you are interested in trading and not investing in real estate for the long term. Having a good understanding of technical analysis will help you know when to enter positions.

Fourth, you need to understand the role of economic data to the real estate industry. Traders use data such as retail sales, wage growth, building permits, interest rates, and home starts to make informed decisions on the industry.

Finally, you need to understand the financial securities that have a relationship with the real estate sector. These securities are in both currencies, commodities, stocks, and indices and are very important for hedging purposes. For example, a rise in the price of lumber leads to a rise in the prices of homes and can lead to lower demand. Another example is in currencies. As the biggest lumber exporter, the Canadian dollar can be affected by the rise or fall of lumber prices.

Succeeding as a real estate investor or trader

Investing in the real estate sector is becoming more and more appealing as the demand for housing around the world increases. As the middle class expands and as urbanization continues, growth in the sector is likely to continue. To succeed in real estate trading you need to have a good understanding of the industry, know how to analyze the multiple data points and know how to manage your risks.