Hedging The Real Estate Market A Must For Investors


Hedging is the practice of risk mitigation for Wall Street investors and we in the real estate investment world could learn a thing or two from the boys in the power ties.

A good working definition of “hedging” to get started:

“An investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.”

As real estate investors we could “cover” the “adverse price movements”…loss of 30% of real estate prices…by taking an “offsetting position in a related security”…but how do we do that?

It’s easier than it sounds.

For example, August 2006, I knew (and so did you as a real estate investor paying attention to the market) we had hit the top for real estate values. I also knew in many markets the top was really a bubble top…the builders over built, the Fed over stimulated, and the mortgage industry over lent.

A burst was eminent….it was “baked into the cake”.

As a holder of real estate one would say a proper “hedge” would just be to sell. Take your profits off the table.

I say, “Hogwash”.

As a long term real estate investor, I’m in it for the monthly cash-flow. It was difficult and costly to acquire these holdings…so I’m not about to dump long term cash-flow for a 1 time payout.

Truly hedging the pending fall in real estate is better option. I want to make back $1 for $1 every lost dollar in real estate equity plus the money it takes to buy the offsetting position.

One perfect way I used were called LEAPS or Long-Term Equity Anticipation Securities. Think of them as 3 year options that you can get a 10-1 leverage. As you know you can option hoping the underlying security goes up – a call option. Or you can option hoping the underlying security goes down – a put option.

So I was looking for a real estate hedge…and I figured the bursting bubble would kill subprime mortgage companies like Novastar and home builders like Toll Brothers and others.

The Perfect Hedge: As real estate values dropped so would the stock price of these companies, so my “offsetting position in a related security” would go up if I shorted the mortgage and home builder stocks. The leverage of using LEAPS 3 year puts gave me all the time I needed from August 2006 to August 2009 to show a profit.

I did a few live seminars in Denver CO in November of 2006, showing folks just how to do this under the title, “How To Profit From the Coming Crash in Real Estate”.

In 3 sessions, I must have taught over 60 people. Most had come wanting to learn about foreclosure investing, most already had rentals…and most looked at me like I was an alien from outer space.

I still get emails 3 years later saying…”I should have listened”

Folks it’s not just good enough to make money from real estate. Sometimes you must use your knowledge to make money on real estate.

My hedge trades are up over 385%…many of the companies I shorted with LEAPS went from $60 a share to bankrupt. Those returns dwarf what small amounts of equity lost due to the real estate crisis.

Think about it…

About Author

Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog, TheMortgageInsider.net, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.


  1. That’s about right–we (as Americans) have become complacent and used to our luxuries. When will we learn that these “get rich quick” schemes and short term high yield investments won’t solve our problems at the end of the day?

  2. Excellent, Excellent, Excellent! This post is for every sophisticated real estate investor. As an economist and finance professional this is a must read. I don’t know this guy but, he is smart and understands markets and finance.

  3. Hunter: I’m not sure what post you read…but this post certainly did endorse “get rich quick” or “short term high yield investments.

    It did however give a technique to “get rich slow” long-term professional income property owners to protect the equity positions they have in those long-term hold properties.

    Cliff: Thanks for stopping by…finally at least one person is not looking at me like I’m an alien from outer space…lol!

  4. Rob you seem to definitely be in the know regarding the current state of Real Estate. I would like to pose a question to you and the forum. Are there investors out there looking to make bulk REO purchases? I have been with a company for the past 6 months that acquires product in bulk for investors. I have spent countless hours forging relationships with the big banks only to find once I have the product the investors can’t follow through. Any advice you can give on finding “real investors” for this sort of thing?

  5. Gather,

    Private real estate investors are mostly “1-off” real estate acquisition specialist…myself included.

    A bulk purchase is not something I or most REI I know would be interested in…and here’s why…

    We all know it only takes 1 bad apple to spoil the bunch. Every REI worth his salt has a story about the 1 deal that almost (or did) sunk him.

    The bank is not in the business of giving away money…so the assumption is their is at least 1 bad apple in the bunch…and probably a lot more.

    As a matter of fact, I’m not sure I could find a corporate investor for such a sale given the fact they’d want them knowing the “spoilage” was high at so far below market…the bank wouldn’t be interested.

    You’d be better off optioning each one…one at a time…and finding individuals to buy them from you. That way you could do the due diligence necessary to weed out the bad ones. You’d be adding value…always a good thing.

    Good Luck with that…


  6. "Solution Drew" on

    With the market as volatile as it is, this information is like gold.

    It’s refreshing to see some in depth content rather than just a “scratch the surface” type blog.

    Kudos to you on this.

  7. Solution Drew:

    Thanks pal…I just wish I was writing for BiggerPockets back in Aug 2006, so I could have shared each trade as I made them.

    Of course, back then when Jim Cramer (Mad Money) was advising everyone in the opposite direction…maybe folks here would have been as dismissive to my hedging with LEAPS as those seminar attendees.

    Who knows…it would have been an interesting experiment.

    Thanks again,

  8. I heard the same thing from another real estate speaker (George Antone or Antoine) years ago. I thought it was interesting but never did anything about it! He also covered other ideas on hedging real estate downturns – I wish I took better notes!

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here