Question, what if you own a permanent shelter and then buy/rent/lease another (or multiple) shelters as an investment. Would you still consider that shorting the housing market?
You are correct though that this can carry added risk.
- Other people's money (leverage via loan)
- Tax write-offs (interest deduction, expense shelter, depreciation).
- Appreciation.
- Equity growth.
- Rental income.
The first two probably can't be obtained via REIT.
I.e. in 2008 when the world was utterly insane your house still kept rain off your head. It's easy to overstate but it's a thing.
When you go for maximum diversity in big markets (like a big REIT), you're competing against a big pool of smart money. There are going to be fewer pricing errors to exploit. You don't have more information than other players, and you don't have any particular control over the management of the investment.
If instead you are an expert in one small market, competing against a smaller pool of other players, you are going to find more pricing errors to exploit. And you are going to achieve much greater control over the investment, so if you happen to think you're an above-average manager (or chooser of managers), you can improve your returns above average.
Diversity isn't everything. It can actually hurt, if it means you're investing in many things you don't understand well, vs a few things you do.