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Personal Finance > Investing
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Getting in on real estate
It moves to a different beat than the rest of the market but may be too cyclical for some investors.
February 26, 2003: 12:14 PM EST
By Sarah Max, CNN/Money Staff Writer

NEW YORK (CNN/Money) - With real estate holding up as well as it has over the past few years, you might be thinking that your interest in property shouldn't be limited to the roof over your head.

Mutual funds specializing in real estate are up an average of 13.3 percent during the three years through Feb. 24, according to Morningstar, while U.S. diversified stock funds are down 11.8 percent over that period.

"Real estate investments have a low correlation with the overall stock market," said Dan McNeela, an analyst for Morningstar. "Owning real estate can certainly dampen the volatility in your portfolio."

Just remember, too much of a good thing can be dangerous -- a lesson technology investors learned when the market was a more profitable beast.

Brick and mortar in your portfolio

The primary way to invest in real estate, other than actually buying property, is through real estate investment trusts (REITs), publicly traded companies that own and, in most cases, operate properties such as apartment buildings, offices and shopping malls. There are 175 publicly traded REITS, most of which are listed on the New York Stock Exchange and American Stock Exchange.

Top 5 Real Estate Funds
Fund Name3-year return12-month yield
Kensington Strategic Realty20.3%6.5%
Alpine Realty Income & Growth19.6%5.9%
Scudder RREEF Real Estate17.6%4.2%
Spirit of America Real Estate17.0%6.8%
Phoenix-Duff&Phelps Real Estate16.6%3.9%
Real estate average13.3%4.0%
U.S. stock average-11.8%0.3%
Source:Morningstar Inc. Funds with more than $50 million in assets

If you're hoping to invest in the housing boom, REITs are probably not your best bet, as 90 percent of the industry's assets are in large-scale commercial real estate.

For diversification purposes this is probably a good thing.

"Some investors believe that they can't own real estate in their investment portfolios because a large percentage of their net worth is tied up in their home," said McNeela. "But REIT investments are extremely different than owning your home."

You can buy shares of a REIT, just as you would stock in a company. For a diverse basket of real estate, however, real estate mutual funds are the way to go. Though REITs represent the bulk of their investments, many such funds also invest in holding companies, home builders, lumber companies and mortgage companies.

There are 70 real estate funds in the Morningstar universe, representing less than 1 percent of all fund assets. Top performers include Kensington Strategic Realty, up 20.3 percent over the past 3 years, Alpine Realty Income & Growth, up 19.6 percent, and Scudder RREEF Real Estate up 17.6 percent.

REITs zig when stocks zag

During the bull market of the late 1990s, real estate investments lagged stocks as a whole. In 1998, real estate funds were down 16 percent while U.S. diversified funds were up about 16 percent. In 1999, real estate was down 2.7 percent, but diversified funds were up 28.8 percent.

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But over the past three years the low correlation between real estate and the rest of the market has worked in real estate investors' favor. In 2000 real estate funds gained 26.8 percent while diversified U.S. stock funds lost 1 percent. And in 2001 and 2002, real estate funds have continued to make money while their diversified peers have suffered negative returns.

Because REITS are required by law to pay out at least 90 percent of their taxable income to shareholders, they also are popular among investors looking for income, particularly with interest rates and bond yields as low as they are now. The average 12-month yield for real estate funds tracked by Morningstar recently was 4 percent, with some funds yielding almost 8 percent.

REITs aren't cash in the bank

Of course, if you believe history will repeat itself (and you should), don't rush into real estate for the sole purpose of injecting instant returns into your portfolio.

"After three solid years of gains, now may not be the time to make the switch into real estate," McNeela said. "Investors should size up risks and returns of the real estate market and add real estate to their portfolio if it makes sense over the long term."

Even then, how much investors should allocate to real estate is a subject of debate.

"Real estate is really a sector of the stock market, and only a very small sector at that," said David Goerz, chief investment officer of mPower, an online investment advisory for individuals and institutions. He warns that real estate is extremely cyclical. "There might be a place for real estate in your portfolio, but your allocation to REITs or real estate funds shouldn't go over 5 percent."

Individual investors, Goerz adds, also should keep in mind that REITs should not be mistaken as an alternative to bonds. "The yields on REITs are attractive, as they are with other stocks right now, but by no means are they anywhere equivalent to bonds in terms of risk profile," he said. "REITs have all of the volatility of equities."

Jack McAllister, vice president of investment affairs for the National Association of Real Estate Investment Trusts (NAREIT) says he won't deny that REITs are a sector of the stock market. "But keep in mind that REITs represent a distinct asset class and have a more predictable return than stocks," he said, noting that institutional investors typically allocate between 5 and 15 percent of their assets to real estate.

If the bulk of your investments are in your company's 401(k) plan, you may have a tough time shifting any of your retirement funds into real estate investments.

In 2001, only 8.6 percent of 401(k) plans offered a real estate fund in their menu of investment options, according to the Profit Sharing/401(k) Council of America, up from 6.3 percent of plans in 2000.

Last year, NAREIT launched an "outreach program" to the nation's largest 401(k) sponsors and administrators in an effort to make real estate more widely available in the plans. Recently, some of the largest administrators, including Principal Financial Group, added real estate to their 401(k) offerings.

Still, "a lot of plan sponsors find it difficult to explain (to employees) what a REIT is," said David Wray, president of the council. "Real estate represents just one tenth of a percent of all 401(k) investments."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.