Real Estate Investment Trusts

A diversification tool which is fantastic for a portfolio heavy with stocks and bonds is Real Estate Investment Trusts (REITs). REITs Invest in different types of real estate therefore the earnings often have more to do with rental and occupancy rates than interest rates that affect stocks and bonds. Many financial planners recommend investing up to 10% of your portfolio in REITs as part of a well balanced asset allocation strategy. One of the many advantages of REITs is that they enable you to invest in real estate without having large amounts of capital and also without the low liquidity due to the time it takes to sell real estate on your own.

When you tuck a real estate trust in your investment portfolio, it will reward you with steadier and better returns than if you limited yourself to stocks and bonds. The average annual increase for real estate over the past 5 years (2001 - 2005) was almost 21 percent, according to data from the National Association of Real Estate Investment Trusts and FTSE, a British index publishing company. And so far this year (as of this publication 2006), real estate mutual funds have returned 16.57 % to investors, reports Morningstar, putting them at the top of the fund research firm's list.

An act of Congress in 1960 made it possible for individuals to invest easily in the commercial real estate market by providing REITs. REITs are pulled asset vehicles similar to mutual funds, but they invest in properties rather than stocks and bonds. REITs are required by tax law to distribute 90% of their taxable income to shareholders. The REITs provide generous dividends for dividend hungry investors but also they offer the potential of stock price appreciation. Even when real estate stocks and funds aren't racing up in price, they tend to pay you in solid dividends that are really rent payments collected by the companies you invested in. Even after the last rip-roaring five years, REITs are paying about 4 percent in dividends, according to their trade association.

So the challenge now is how does one make REITs a part of his/her portfolio diversification now that the real estate market boom is gone and heads into a downward direction? In an article published in the Orange County Register by columnist Linda Stern, the following five suggestions are given:

1. Buying another house is not diversifying! For investing purposes, you are probably better off with a diversified REIT that owns commercial or retail property. Most experts see the single-family housing market as softening now, but that's not necessarily true of commercial property.

2. Due to the high price of real estate don't overdo it. "It should be a small percentage of a very well-diversified portfolio," says David Lee, who manages the T. Rowe Price Real Estate Fund. But if you don't hold any real estate, it's not too late to buy. "It looks expensive, but by private market valuations, (REITs) look very reasonably priced," Lee says. Rents and property values have continued to rise, keeping their valuations within reason, he suggests.

3. Due to tax laws make sure that your REITs are in the right place. The worst thing about REITs is this: Their payouts don't qualify for the low 15 percent tax that applies to most stock dividends. So you're better off tucking your real estate investments into your 401-k or tax-favored Individual Retirement Account.

4. All REITs are not alike. A fund should have above-average returns and below-average fees for its category, should show steadily increasing dividends, strong increasing earnings, and a reasonable price-earnings ratio.

5. Think international. Many REITs now buy foreign properties, and foreign-based REITs are also represented in U.S. markets.

So remember, try to construct five to ten percent of your portfolio diversification with REITs. This should provide a long term steady growth as well as income generating dividend payments. For more information on REITs you can go to The National Association of Real Estate Investment Trusts (NAREIT) web site at http://www.nareit.com.

Scott G. Henderson has written many articles about the subject of financial portfolio management. After years of personal experience, education and research he spent over 18 months writing and developing the educational curriculum "Successful Online Portfolio Management"

If you found this article to be informative and would like to know more about REITs and the fundamentals and strategies of portfolio management please click on this link: http://www.OnlineInvestmentGuide.com.