Real Estate Investment Trusts

A diversification tool which is fantastic for ayears, REITs are paying about 4 percent in
portfolio heavy with stocks and bonds is Realdividends, according to their trade association. So
Estate Investment Trusts (REITs). REITs Investthe challenge now is how does one make REITs a
in different types of real estate therefore thepart of his/her portfolio diversification now that
earnings often have more to do with rental andthe real estate market boom is gone and heads
occupancy rates than interest rates that affectinto a downward direction? In an article published
stocks and bonds. Many financial plannersin the Orange County Register by columnist Linda
recommend investing up to 10% of your portfolioStern, the following five suggestions are given:
in REITs as part of a well balanced asset allocation1. Buying another house is not diversifying! For
strategy. One of the many advantages of REITsinvesting purposes, you are probably better off
is that they enable you to invest in real estatewith a diversified REIT that owns commercial or
without having large amounts of capital and alsoretail property. Most experts see the single-family
without the low liquidity due to the time it takeshousing market as softening now, but that's not
to sell real estate on your own. When you tuck anecessarily true of commercial property.
real estate trust in your investment portfolio, it2. Due to the high price of real estate don't
will reward you with steadier and better returnsoverdo it. "It should be a small percentage of a
than if you limited yourself to stocks and bonds.very well-diversified portfolio," says David Lee,
The average annual increase for real estate overwho manages the T. Rowe Price Real Estate
the past 5 years (2001 - 2005) was almost 21Fund. But if you don't hold any real estate, it's not
percent, according to data from the Nationaltoo late to buy. "It looks expensive, but by
Association of Real Estate Investment Trusts andprivate market valuations, (REITs) look very
FTSE, a British index publishing company. And soreasonably priced," Lee says. Rents and property
far this year (as of this publication 2006), realvalues have continued to rise, keeping their
estate mutual funds have returned 16.57 % tovaluations within reason, he suggests.
investors, reports Morningstar, putting them at3. Due to tax laws make sure that your REITs
the top of the fund research firm's list. An act ofare in the right place. The worst thing about
Congress in 1960 made it possible for individualsREITs is this: Their payouts don't qualify for the
to invest easily in the commercial real estatelow 15 percent tax that applies to most stock
market by providing REITs. REITs are pulled assetdividends. So you're better off tucking your real
vehicles similar to mutual funds, but they invest inestate investments into your 401-k or
properties rather than stocks and bonds. REITstax-favored Individual Retirement Account.
are required by tax law to distribute 90% of their4. All REITs are not alike. A fund should have
taxable income to shareholders. The REITsabove-average returns and below-average fees
provide generous dividends for dividend hungryfor its category, should show steadily increasing
investors but also they offer the potential ofdividends, strong increasing earnings, and a
stock price appreciation. Even when real estatereasonable price-earnings ratio.
stocks and funds aren't racing up in price, they5. Think international. Many REITs now buy foreign
tend to pay you in solid dividends that are reallyproperties, and foreign-based REITs are also
rent payments collected by the companies yourepresented in U.S. markets.
invested in. Even after the last rip-roaring five