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Real estate investment opportunities abound

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Real estate investment trusts (REITs) are one alternative. These are publicly traded stocks of companies that own and often manage several commercial properties. Because the asset class has little correlation with other common stocks, they provide diversification in a portfolio.

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However, REITs do have their ups and downs.

The individual investor who wants some exposure to commercial real estate today, for example, would do well to choose a REIT mutual fund in lieu of an individual REIT stock, says John Coumarianos, a fund analyst at Morningstar. "Something like the Vanguard REIT Index Fund would be much more appropriate because it is a much more diversified investment."

Although they work like a mutual fund in that they are usually a holding of a group of managed properties, individual REITs tend to be quite specialized in the assets they own. For example, some focus on apartment buildings, others on office buildings, hotels or shopping centers. As a result, REIT stocks can be more vulnerable to cyclical economic forces as well as those of supply and demand.

Coumarianos says individuals should consider having a small percentage of their portfolio invested in REIT funds, and he cautions new investors against making any large investments today, given the spectacular performance these investments have enjoyed in recent years. They've gained 22 percent a year on average over the five-year period through March 9. Many REITs have now become overvalued, and there's a high likelihood that many could be in for a correction this year. In addition, he says, "the yield for the whole index is, right now, less than that of the 10-year Treasury."
REIT funds shouldn't comprise more than five to 10 percent of an investment portfolio. Coumarianos suggests investors buy into a REIT fund very gradually -- "dollar-cost averaging and only buying on dips." Conversely, should you already own REITs that enjoyed a multi-year run-up in value, he recommends rebalancing the portfolio so that the exposure to real estate is back in line with your originally set asset allocation.

Also, he reminds investors that the yield from REITs isn't tax-advantaged or taxed at the 15 percent rate, so these investments are best held in a tax-sheltered account such as an IRA.

Owning a piece of a skyscraper
Investing money in a tenant-in-common (TIC) property is another alternative some might want to consider, says Tom Milana, CEO of Milana Real Estate Investing Group. "TICs provide a way of owning institutional-grade real estate, with attractive income and appreciation potential, at a price investors can tailor to their individual needs."

Tenant-in-common properties are a relatively new phenomenon, one that weaves together the complex worlds of commercial real estate, securities, finance and law. First offered by a small group of companies based in southern California in the 1990s, TICs have gained popularity thanks to a favorable Internal Revenue Service procedure ruling which recognized a TIC as real estate, not a partnership. That ruling paved the way for TICs to be used as 1031 exchange properties. In her book, "Effortless Cash Flow: The ABC's of TICs," Kathy Heshelow said there were more than 70 sponsored TIC offerings nationwide in 2006.

Next: " ... the benefits of real estate ownership are plentiful ... "
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10 lethal mistakes for real estate investors
Property swaps can save tax dollars
The finer points of like-kind exchanges
How to lower your property taxes
Forged signature puts kibosh on home sale
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