(MONEY Magazine) – It's time for a fresh look at real estate investment trusts (REITs), which own and manage apartment and office buildings, hotels, warehouses and shopping centers.

When other stocks are soaring, investors tend to ignore slower-moving REITs. Indeed, the typical REIT gained an average of only 10.4% annually from the start of 1994 to Sept. 1 of this year, vs. 15.8% for Standard & Poor's 500-stock index. But with many analysts, including Money investment strategist Michael Sivy, predicting that stock prices will fall 15% or so within the next 12 months, REITs suddenly look appealing. They offer juicy yields that average around 7.4%, plus potential price appreciation that could deliver total returns of 16% or more over the next year. In addition, REITs are attractive bets right now because they've historically lost less than other stocks--or even managed to gain value--during market downturns.

If you're leery of investing in bricks and mortar because you were burned in the real estate crash of the mid- to late-1980s, rest assured that times have changed. The open-handed savings and loan associations and the unduly generous federal tax breaks that combined to produce a glut of offices, hotels and warehouses back then are gone. Real estate values, which hit bottom in 1993, have since rebounded 15%. Says Robert Benson, manager of Pioneer Real Estate Shares, a mutual fund that invests in REITs: "Demand for rental space has caught up with supply because few new properties have been built over the past 10 years despite steady economic growth." Indeed, over the past year, suburban office building vacancies have fallen from 14.3% to 12.2%.

Analysts also note that real estate moguls are snapping up reasonably priced existing buildings instead of putting up new ones in such hot markets as Boston, Denver, Los Angeles and Phoenix. That makes it unlikely that new construction will drive down rents for properties owned by existing REITs. Says Michael Metz, chief investment strategist of Oppenheimer & Co. in New York City: "In 1993 and 1994, a lot of new REITs were issued at inflated prices. But now that real estate values have recovered, those REITs look like better values."

That's not to say that all REITs are set to prosper in the next year. Analysts don't recommend most REITs that own shopping centers because retail sales remain sluggish. But they generally like REITs that own suburban office buildings and hotels. Explains analyst Catherine Creswell of Alex. Brown & Sons in Baltimore: "Lower vacancy rates and higher rents in office buildings plus higher occupancy rates in hotels will translate into accelerating earnings." Creswell also favors all types of property in California, where the 1990s recession arrived late, hit very hard and started to recede only a year ago.

REITs have a couple of tax quirks worth noting. First, REITs must by law pay 95% of their net taxable income--cash flow minus depreciation--to shareholders as dividends. In practice, the payouts amount to 65% to 85% of a REIT's cash flow. As a result, investors can expect dividends to keep increasing if a REIT's cash flow is growing. The tax law also allows investors to treat an average of about 30% of a REIT's dividend as a nontaxable return of capital. That means you don't pay income tax--as high as 39.6%, depending on your bracket--on that portion of your dividend. Instead, you reduce the price you paid for the REIT shares by that amount when you eventually sell the stock. Ultimately, of course, you'll owe tax on a larger capital gain if you unload the stock for a profit, but the capital-gain tax is capped at 28% under current law.

A word of warning: Don't buy just one REIT, because most specialize in a single type of property, and many specialize in a single geographic region. Thus a slump in a particular industry or region can send a REIT's shares into a tailspin. Analysts therefore advise investors to buy at least five different REITs, or to invest in a broadly diversified mutual fund that holds real estate stocks. (For four top funds, see the box on page 106.)

That said, here are six REITs you should consider buying now. All are traded on the New York Stock Exchange and are discussed below in descending order of yields; target share prices and projected total returns are for the next 12 months.

--EQUITY INNS (ticker symbol: ENN; recently traded at $12.75; 8.8% yield) is one of fund manager Robert Benson's favorite hotel REITs. Equity racks up revenues of $33 million a year from 45 properties nationwide, 32 of which are Hampton Inns that charge a moderate $50 to $75 a night for a double room. Because cost-conscious vacationers and companies that want to hold down employee travel costs favor such hotel chains, analysts expect Equity's earnings to grow as much as 15% annually over the next two years. Benson believes the stock could hit $15 for a 26% total return.

--STORAGE TRUST REALTY (SEA; $21; 7.8%) pulls in $32 million a year by giving home and business owners a place to stash stuff they can't cram into their apartments, basements, garages or offices. "With more people living in condominiums, lack of storage space has become a big problem," says analyst Burl East of Everen Securities, a Chicago brokerage that tracks REITs. This year, Storage Trust, one of the biggest players in the mostly fragmented self-storage industry, added properties in Denver and Kansas City, Kans., bringing its total to 172 facilities in 18 states. East thinks Storage Trust's cash flow will increase 10% a year, enabling the stock price to hit $25 for a 27% total return.

--MERRY LAND & INVESTMENT (MRY; $21; 7%), with $168 million a year in revenues from more than 23,800 apartments in Texas and nine other southern states, aims to own 50,000 units by the year 2000. Alex. Brown analyst Catherine Creswell expects that the occupancy rate in Merry Land's buildings will reach 96% late this year, allowing the REIT to raise rents. As a result, Creswell believes that cash flow will grow 8% and dividends will increase 6% annually over the next three years. She thinks the stock could reach $25.50 for a 28% total return.

--DUKE REALTY INVESTMENTS (DRE; $32.75; 6.2%) derives its $156 million annual revenues from 243 offices and warehouses in eight midwestern states, a region that's attracting new manufacturers because of its central location and thriving economy. Robert Benson expects Duke's dividend of $2.04 a share to rise within a year to about $2.20. He also figures Duke will increase its cash flow 10% to 12% annually over the next two or more years by putting up new buildings and raising rents in existing suburban office buildings. Benson's target price for the stock is $36, for a 16% total return.

--BAY APARTMENT COMMUNITIES (BYA; $27.50; 5.8%) rakes in $64 million a year from 33 apartment complexes in San Francisco and the still growing Silicon Valley near San Jose. "Few new buildings are going up in the San Jose area because of high construction costs and strict zoning regulations, so this REIT has been able to impose double-digit annual rent increases for the past two years without losing tenants," says Creswell. While Bay's yield is below average, its dividend should rise if its cash flow grows 15% a year, as Creswell predicts. She believes the stock can hit $32 and provide shareholders with a 22% total return.

--FELCOR SUITE HOTELS (FCH; $32; 5.7%), with $64 million in annual revenues, is the favorite hotel REIT of many analysts and mutual fund managers because all-suite hotels are increasingly popular with families and business travelers. An added plus: Felcor operates 41 highly regarded Embassy Suites hotels in 17 states and is converting four recently acquired Crown Sterling Suites hotels into Embassy Suites. Analyst Gregory Whyte of Dean Witter Reynolds expects Felcor's cash flow to grow 18% or more this year and next. He thinks the stock will reach $36 for an 18% total return.

If you feel your interest building in real estate, analysts and financial planners advise that you devote no more than 15% of your portfolio to REITs or REIT funds. That way, you won't have too much of your portfolio locked up in a sector that would lag the stock market if it took off again. But even that modest stake can help you earn more investment income, boost your total return and protect your portfolio against nasty losses during a market downturn.