Profiting from Real Estate - Now It's as Easy as R-E-I-T

Article excerpt

IF "REIT" came up on a crossword puzzle, many Americans might need more than one clue.

But since the early 1990s, investors have poured billions of dollars into these investments: real estate investment trusts. The market value of their shares has risen 160 percent to more than $100 billion. Assets held by REITs - property, buildings, etc. - are valued at more than $88 billion.

Though the REIT road has its bumps, like any risky investment, shareholders have fared well. Looking at the past five-year period, REITs outperformed a number of benchmarks, including the Standard & Poor's 500 stock index, according to industry officials. The most popular type of REITs, equity REITs, did particularly well (see box). These are diversified holding companies that issue stock shares and buy income-producing property.

Two caveats are in order, experts say. When REITs floundered in past years, such as the early 1970s, massive financial losses resulted for many investors, says Cebra Graves, an analyst with the financial-services firm Morningstar Inc. in Chicago. Second, he says, REITs have accounting methods that, while perfectly acceptable, make it difficult for investors to apply traditional stock-analysis tools (such as the price-earnings ratio).

"The {REIT} industry today is totally different than the industry of the 1960s or 1970s," says Mark Decker, president of the National Association of Real Estate Investment Trusts (NAREIT), a Washington-based trade group. Back then, Mr. Decker concedes, REITs were often overleveraged with debt, and some were shoddily managed. Today's REITs are far more shareholder-oriented, he says. Managers are more sophisticated. Leveraging is modest.

Although stressing that he is not a financial analyst, Decker says total return for REITs this year could exceed 15 percent, versus broader stock-market gains of perhaps 10 percent.

REITs have characteristics of both publicly owned companies and mutual funds. They trade as securities on stock exchanges and can be purchased through brokers. Investors can buy into a REIT - and thus, own or finance a part of some real estate properties - for as little as $20 to $50 a share.

Like a mutual fund, REITs are diversified. They offer higher dividend yields than most stocks. "Investors get a yield kick with REITs," says Lisa Sarajian, who follows REITs for Standard & Poor's Corp.

Legislation authorizing REITs was signed into law by President Eisenhower in 1960. REITs were designed to allow small investors to participate in the ownership of commercial real estate and other mortgage-based projects. …