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Investing > Real Estate Investments
Real estate funds see strong first quarter, may gain appeal as bond alternative
MEG RICHARDS, AP Business Writer. Associated Press.
Copyright Associated Press
NEW YORK (AP) _ Most people associate the idea of investing in real estate with the minutiae of property ownership _ finding tenants, collecting rents and dealing with plumbing catastrophes.
But you don't have to become a landlord to own a piece of America's real estate market. A mutual fund will allow you to invest smaller amounts of money and gain broader exposure to different property types and geographic regions. Selling shares is far easier than putting a home or commercial space on the market, and, most compelling to many investors, real estate funds pay substantial dividends which may grow over time.
"There are absolutely ways a small investor can profitably invest in real estate, and do so in a way that not only is less costly, but that is less time-consuming for them than owning property," said Lynnette Khalfani, a former Wall Street Journal reporter and the author of "Investing Success."
Instead of owning a single piece of property, you can mitigate risk by owning a fund with exposure to many property types _ from apartment and office complexes to shopping malls, race tracks, mobile home parks and railroad rights of way. Funds typically hold real estate investment trusts, or REITs, but they may also invest in real estate operating companies, home builders, mortgage companies and corporate bonds secured by property.
"We believe the equitization of real estate in America is going to be one of the biggest forces in the marketplace for quite a while," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. "It's certainly been a growth business ... and it's become a bigger and bigger part of the overall success of the U.S. economic engine."
Real estate operating companies and REITs are similar in that they are publicly traded entities that pool investor assets to purchase and manage property or mortgage loans, but they are structured differently. Unlike operating companies, REITs are required to distribute up to 90 percent of their taxable income to investors in the form of dividends. Because REITs don't pay corporate income tax, investors are taxed at the regular rate, rather than the reduced 15 percent rate charged on most stock dividends.
This is of minimal concern to investors focused on income, because the average REIT fund pays about 7 percent a year, compared to only 2 percent for the average stock fund. Most long-term bonds pay about 4.5 percent.
"In today's environment, with a yield that's higher than Treasuries and corporate bonds, why wouldn't you want to own real estate? I think REITs will become a preferred vehicle for people seeking income," Battipaglia said.
After this year's tumultuous first quarter, most stock funds had given back any gains they'd made since Jan. 1, according to mutual fund watcher Lipper Inc. But real estate funds led all sectors with an average 11.9 percent return. Last year, the average real estate fund advanced 37 percent, beating the overall market.
Market watchers don't expect to see that kind of surge again anytime soon. But it's worth noting that real estate funds were the only type of fund, bond or equity, to post gains from 2000 to 2003, straight through the bear market.
A strong case can be made for investing in real estate this year. In an improving economy, occupancy rates rise as businesses expand, and demand pushes up rents. In addition, rising interest rates disqualify the most marginal home buyers, so residential occupancy rates remain high, as well, said Don Cassidy, a senior research analyst with Lipper
"Right now, they're in a very nice position. They're not as safe as a government bond, but they're paying a bit more and they have the potential for income growth over time, which bonds do not," Cassidy said. "It's certainly an interesting strategy for people who are wondering if they should stay in a long-term bond fund ... and they don't want to go down to a short-term bond fund."
Most funds focus on REITs, but a few portfolio managers, such as Michael Winer of the Third Avenue Real Estate Value fund, prefer real estate operating companies, because they're able to reinvest their capital and grow over time. Since this strategy focuses on long-term appreciation rather than dividends, this type of fund might not be right for someone seeking income.
"There are a lot of REITs out there that are nothing special," said Winer. "They're simply accumulators of assets. We're not investing in those companies. We're looking for those that will add value over the long term ... and add something special."
Because real estate tends not to correlate with other asset classes, it can offset losses when the broader market underperforms. Even so, most financial planners say real estate should make up only about 5 percent to 10 percent of your total portfolio.
You might also invest in one of the several exchange-traded funds that track real estate stocks. One popular ETF that follows the Dow Jones real estate index is traded under the ticker symbol IYR.
On the Net: www.lipperweb.com www.morningstar.com www.standardandpoors.com
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Dateline: NEW YORK
Text Word Count 840
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