Commercial real estate (office buildings, shopping centers, etc.) is considered to be a separate asset class from stocks and bonds. Thus, an investor can gain additional diversification by investing in commercial real estate. If you aren’t able to buy a group of apartment buildings or shopping centers, and most of us aren’t, the way to invest in real estate is through a REIT (Real Estate Investment Trust) which owns a number of properties or mortgages. Equity REITs own properties. Mortgage REITs are similar to long term bond funds. Of course, rather than trying to select one or two REITs, investing in a REIT/real estate fund is hiring a professional manager to do it for you and provides diversification. There are a number of excellent REIT/real estate mutual funds, see MUTUALdecision’s top ten Real Estate Funds list.

 

One attraction of REIT funds is their relatively high current yield. But beware, check the fund to see if its yield is enhanced through the use of debt or preferred stocks. These investments can boost the yield at the expense of long term growth. You need to consider the short-term/long-term trade-off and decide which fund investment profile is right for you. Also, be aware that REITs and REIT/real estate funds have had quite a run over the past few years. Some pundits believe they are fully valued or due for a correction. Lastly, note the “conventional wisdom” that real estate investments go down when interest rates go up. Indeed, REIT stocks/funds have been weak over the past couple of weeks as interest rates increased. I don’t subscribe to the interest rate/real estate stock fund price relationship except on a short term basis. Long term, a good REIT/real estate fund will make investments which will increase in value.

 

REIT/real estate funds should be part of any investor’s portfolio and you also might consider an international real estate fund.