How to Beat the Market with Real Estate Stocks

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It seems the professors have learned and proved what I have known all along and have used to build out Total Return Portfolio here at Real Income Report. See, some revolutionary research reveals six powerful strategies that can supercharge your real estate investment returns.

If you've ever invested in Real Estate Investment Trusts (REITs) – those companies that own shopping malls, apartment buildings, office towers, and warehouses, like our Big Five REITs – you might think you're stuck with whatever the market gives you. But groundbreaking new research has uncovered six specific strategies that have consistently beaten the market over the past 35 years.

REITs represent a $1.5 trillion market that lets regular investors own pieces of commercial real estate without buying entire buildings. Until now, most investors have treated REITs just like any other stock. But researchers at Florida State University, University of Tulsa, and Auburn University discovered that real estate stocks follow their own rules – and those rules can make you money.

What Makes REITs Different from Regular Stocks

Think about it: REITs own real buildings with real tenants paying real rent. This makes them fundamentally different from tech companies or manufacturers. They're required by law to pay out at least 90% of their profits as dividends, they can't pile up cash like Apple, and their success depends on things like location, lease terms, and property management – not just quarterly earnings.

The researchers studied 364 different REITs from 1987 to 2023 and found that traditional stock-picking strategies often miss the boat when applied to real estate. Instead, they identified six "factors" – think of them as investment strategies – that consistently identify winning REITs before they take off.

The Six Winning Strategies

Strategy #1: Size Matters (But Not How You'd Think)

In the regular stock market, small companies often outperform large ones over time. With REITs, this "small-cap premium" barely exists. The research found that focusing on company size alone generates only modest returns.

Why? Small REITs might be more nimble and focused on local markets, but large REITs have massive advantages in raising capital, managing properties efficiently, and negotiating with tenants. In real estate, scale often wins. This means investors shouldn't automatically favor smaller REITs like they might with regular stocks.

Strategy #2: Value Investing Gets Complicated

Here's where things get interesting. Traditional value investing, buying "cheap" stocks based on metrics like price-to-book ratio, actually loses money in REITs if you do it the old-fashioned way. The researchers found value strategies generated negative returns when used alone.

But here's the twist: when you account for other factors, value investing becomes incredibly powerful. The problem is that "cheap" REITs are often cheap for good reasons.

They might have declining properties, poor management, or be in terrible locations. Successful value investing in REITs requires looking beyond simple price metrics to understand why a REIT is trading at a discount.

Strategy #3: Momentum – The Powerhouse Strategy

This is the champion of REIT investing. Momentum means buying REITs that have been performing well recently and avoiding those that have been struggling. In the REIT world, this strategy generated impressive monthly returns with exceptional consistency.

Why does momentum work so well with REITs?

Real estate markets move slowly. When a REIT starts performing well that trend tends to continue for months or even years. Good REITs keep getting better, and struggling ones often keep struggling.

Even after accounting for trading costs, momentum strategies still delivered 0.53% monthly returns. For context, that's about 6.4% annually just from this one strategy.

Strategy #4: Quality Always Wins

Quality investing means buying REITs with strong financials, stable earnings, and excellent operations. This strategy proved especially valuable during periods of high inflation, when quality REITs could pass rising costs on to tenants.

Quality REITs typically have several characteristics: they own properties in prime locations, maintain conservative debt levels, have diversified tenant bases with creditworthy renters, and employ experienced management teams with proven track records. These REITs weather economic storms better and provide more predictable returns over time.

The research showed that quality becomes even more important during uncertain times. When markets get choppy, investors flock to REITs they can trust, driving up prices for the highest-quality companies.

Strategy #5: Low Volatility for the Risk-Averse

Some REITs are simply less risky than others, and the market doesn't always properly reward this stability. The low volatility strategy identifies these steadier REITs that provided excellent downside protection during market crashes.

Low volatility REITs often focus on essential properties like grocery-anchored shopping centers, medical facilities, or properties with long-term government leases. These REITs won't give you explosive growth, but they provide steady, reliable returns that compound nicely over time.

This strategy works particularly well during economic expansion periods when investors begin to appreciate stability and predictable cash flows. It's perfect for investors nearing retirement or anyone who wants real estate exposure without the roller coaster ride.

Strategy #6: Contrarian Investing – The Highest Returns

The most profitable strategy of all was "short-term reversal," essentially buying REITs that have been beaten up recently but have strong fundamentals. This contrarian approach generated an astounding monthly return that was the highest of all six strategies.

Why does this work?

Real estate markets often overreact to bad news. When a REIT reports disappointing quarterly results or faces temporary challenges, the stock price might fall more than warranted by the actual impact on the underlying properties.

Smart contrarian investors can profit when prices eventually recover to reflect true value.

The key is distinguishing between temporary setbacks and permanent problems. A REIT might drop because of short-term construction disruptions or one-time expenses, but if the underlying properties and business model remain sound, the price often bounces back strongly.

How These Strategies Work Together

The magic happens when you combine these strategies instead of using them individually. The researchers found that high-quality REITs often show positive momentum (Strategy #3 + Strategy #4), while value opportunities frequently emerge after temporary selloffs (Strategy #2 + Strategy #6).

However, some strategies work against each other. Value and momentum have a strong negative correlation – cheap REITs often have poor recent performance, while REITs with great recent performance rarely trade at discount prices. Understanding these relationships helps investors build balanced portfolios that capture multiple sources of return.

Real-World Performance and Costs

These aren't just theoretical strategies – they work in the real world even after accounting for trading costs. The researchers factored in bid-ask spreads, commissions, and the market impact of buying and selling, and several strategies remained highly profitable.

Momentum kept 0.53% monthly returns after costs, quality maintained 0.43%, and the contrarian reversal strategy delivered 0.57%. Even low volatility strategies provided positive returns of 0.22% monthly after expenses.

During major market crises like 2008-2009 and the 2020 COVID pandemic, different strategies showed their worth. Quality and momentum strategies held up relatively well during the chaos, while value strategies struggled but then rebounded strongly during recoveries. Contrarian strategies typically suffered during the worst of market panics but generated exceptional returns when markets stabilized.

Why REITs Are Different from Regular Stocks

The research proved that REITs truly are a different animal from regular stocks. When the researchers compared REIT-specific strategies to their stock market equivalents, the differences were dramatic:

• REIT momentum achieved a Sharpe ratio (a measure of risk-adjusted returns) of 0.69 versus just 0.30 for stock momentum

• REIT quality scored 0.44 compared to 0.24 for stock quality

• Most remarkably, REIT contrarian strategies hit 0.83 versus only 0.10 for stock contrarian approaches

These massive differences suggest that real estate markets are less efficient than stock markets, creating bigger opportunities for smart investors who understand how to analyze REITs properly.

The Technology Revolution in Real Estate

The research has implications beyond traditional property types. Technology is reshaping real estate, creating new investment opportunities in areas like:

Data centers and cell towers have shown exceptional momentum characteristics as our digital economy grows. These "digital infrastructure" REITs often exhibit both momentum and quality characteristics.

Industrial properties serving e-commerce have benefited from online shopping growth, while traditional retail faces ongoing challenges. Factor strategies help identify which retail REITs are successfully adapting and which are falling behind.

Smart buildings and energy-efficient properties are becoming quality factors as tenants increasingly demand modern, efficient spaces.

What This Means for Your Portfolio

This research represents a breakthrough in understanding how to invest in REITs successfully. For the first time, investors have a systematic, data-driven approach to REIT selection that goes far beyond gut feelings or simple valuation metrics.

The key insight is that REITs require specialized analysis. Just as you wouldn't analyze a bank the same way you analyze a software company, you shouldn't analyze REITs the same way you analyze regular stocks. Real estate has its own dynamics, cycles, and opportunities.

By focusing on momentum, quality, and contrarian opportunities while being cautious about traditional value approaches, investors can potentially generate superior returns from their REIT investments. The strategies work because they capture the unique characteristics of real estate markets: the persistence of trends, the importance of operational excellence, and the tendency for markets to occasionally overreact to temporary news.

You’ll find my favorite big REITs in our free Big Five report right here.