Two of the smartest investors in the business are John Paulson and Stephen Mandel. 

#-ad_banner-#Paulson, by far the more famous of the two, is best known for making $15 billion in the financial crisis by shorting the housing market. 

In contrast, Mandel started his hedge fund, Lone Pine Capital, in 1997 after studying under Julian Robertson  at Robertson’s investment firm Tiger Management. That makes Mandel a member of the “Tiger Cubs,” a group of Robertson proteges that includes the likes of John Griffin, Lee Ainslie and Chase Coleman.

One thing both investors agree on is that housing won’t stay in the doldrums forever. While housing has been recovering since it bottomed in 2009, housing starts still aren’t where they were before the financial crisis. (My colleague Dorian Davis recently suggested a clever way to profit from this trend.)

Paulson and Mandel are investing in the housing recovery with real estate firm Realogy Holdings (NYSE: RLGY). Each has a stake worth over $500 million in Realogy, and together, they own more than a sixth of the company.

As the largest owner and franchiser of residential real estate brokerages in the U.S., Realogy owns some of the biggest names in the business. Last year, Realogy’s brokerage operations handled 18% of all U.S. residential real estate transactions. 

Real estate transactions accounted for 84% of its $5.3 billion in revenue last year, with the rest came from various loan, title and relocation services.

The best part of Realogy is its business model. The company franchises the names Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, and Better Homes and Gardens. Its franchise segment has over 13,700 offices worldwide and nearly 250,000 employees. Realogy also owns its largest franchisee, NRT, which operates 710 offices in the U.S.

Realogy gets a piece of every sale as part of its franchise agreements, so the company generates a tremendous amount of free cash flow: an estimated $734 million this year and $900 million in 2015. 

Realogy is looking to expand its presence online with its purchase of ZipRealty (Nasdaq: ZIPR) for $166 million. The deal addresses a need for Realogy by giving it a technology platform that connects buyers, brokers and sales associates, which should greatly improve its customer service.

In addition to its technology platform, ZipRealty also has residential real estate brokerage operations with 23 offices across the U.S. Last year, these offices closed $2.7 billion in sales and contributed the majority of ZipRealty’s $32 million in gross profits.

The focus for Realogy is paying down its debt load. Despite its prodigious free cash flow, the company currently has only $119 million in cash and $4.2 billion in debt. Because of its high debt load, Realogy has a junk rating. By paying down its debt, Realogy could improve its credit rating and lower its borrowing costs. 

Concerns about a housing slowdown have hit shares this year. Shares of Realogy are down over 25% so far this year. 

But RLGY is now trading at a trailing price-to-earnings (P/E) ratio of just 11.9. Its P/E-to-growth (PEG) ratio is now a low 0.8, and it’s trading well below its real estate peers, including CBRE Group (NYSE: CBG) and Zillow (Nasdaq: Z). 

Shares of Realogy fell off a cliff in early May after posting quarterly results well below expectations. Its loss of $0.32 for the quarter missed expectations by nearly 70%, but it was still above the $0.52 loss in the same quarter last year. However, earnings are expected to grow by over 50% next year, and analysts have set a bullish average price target of $45. 

Risks to Consider: Realogy has a highly leveraged balance sheet with over $4 billion in debt. If the housing market slows, it’ll have a big impact on Realogy’s ability to pay down its debt. This would further delay the company from paying a dividend or instituting share buybacks.

Action to Take –> Buy shares of Realogy with a price target of $45, representing upside of 16%. 

For months, my colleague Nathan Slaughter has been telling readers of his High-Yield Investing advisory about an enormous opportunity in real estate. To learn more about Nathan’s absolute favorite picks in real estate — which help regular investors unlock an income stream previously reserved only for America’s privileged elite — follow this link.