| A diversification tool which is fantastic for | | | | is how does one make REITs a part of his/her |
| a portfolio heavy with stocks and bonds is | | | | portfolio diversification now that the real |
| Real Estate Investment Trusts (REITs). REITs | | | | estate market boom is gone and heads into a |
| Invest in different types of real estate | | | | downward direction? In an article published |
| therefore the earnings often have more to do | | | | in the Orange County Register by columnist |
| with rental and occupancy rates than interest | | | | Linda Stern, the following five suggestions |
| rates that affect stocks and bonds. Many | | | | are given: |
| financial planners recommend investing up to | | | | |
| 10% of your portfolio in REITs as part of a | | | | 1. Buying another house is not diversifying! |
| well balanced asset allocation strategy. One | | | | For investing purposes, you are probably |
| of the many advantages of REITs is that they | | | | better off with a diversified REIT that owns |
| enable you to invest in real estate without | | | | commercial or retail property. Most experts |
| having large amounts of capital and also | | | | see the single-family housing market as |
| without the low liquidity due to the time it | | | | softening now, but that's not necessarily |
| takes to sell real estate on your own. When | | | | true of commercial property. |
| you tuck a real estate trust in your | | | | |
| investment portfolio, it will reward you with | | | | 2. Due to the high price of real estate don't |
| steadier and better returns than if you | | | | overdo it. "It should be a small percentage |
| limited yourself to stocks and bonds. The | | | | of a very well-diversified portfolio," says |
| average annual increase for real estate over | | | | David Lee, who manages the T. Rowe Price Real |
| the past 5 years (2001 - 2005) was almost 21 | | | | Estate Fund. But if you don't hold any real |
| percent, according to data from the National | | | | estate, it's not too late to buy. "It looks |
| Association of Real Estate Investment Trusts | | | | expensive, but by private market valuations, |
| and FTSE, a British index publishing company. | | | | (REITs) look very reasonably priced," Lee |
| And so far this year (as of this publication | | | | says. Rents and property values have |
| 2006), real estate mutual funds have returned | | | | continued to rise, keeping their valuations |
| 16.57 % to investors, reports Morningstar, | | | | within reason, he suggests. |
| putting them at the top of the fund research | | | | |
| firm's list. An act of Congress in 1960 made | | | | 3. Due to tax laws make sure that your REITs |
| it possible for individuals to invest easily | | | | are in the right place. The worst thing about |
| in the commercial real estate market by | | | | REITs is this: Their payouts don't qualify |
| providing REITs. REITs are pulled asset | | | | for the low 15 percent tax that applies to |
| vehicles similar to mutual funds, but they | | | | most stock dividends. So you're better off |
| invest in properties rather than stocks and | | | | tucking your real estate investments into |
| bonds. REITs are required by tax law to | | | | your 401-k or tax-favored Individual |
| distribute 90% of their taxable income to | | | | Retirement Account. |
| shareholders. The REITs provide generous | | | | |
| dividends for dividend hungry investors but | | | | 4. All REITs are not alike. A fund should |
| also they offer the potential of stock price | | | | have above-average returns and below-average |
| appreciation. Even when real estate stocks | | | | fees for its category, should show steadily |
| and funds aren't racing up in price, they | | | | increasing dividends, strong increasing |
| tend to pay you in solid dividends that are | | | | earnings, and a reasonable price-earnings |
| really rent payments collected by the | | | | ratio. |
| companies you invested in. Even after the | | | | |
| last rip-roaring five years, REITs are paying | | | | 5. Think international. Many REITs now buy |
| about 4 percent in dividends, according to | | | | foreign properties, and foreign-based REITs |
| their trade association. So the challenge now | | | | are also represented in U.S. markets. |