The over 200 REITs (real estate investment trusts) as a whole returned 25.9 percent, according to the National Association of Real Estate Investment Trusts (NARETT). Real estate mutual funds, which mostly invest in REITs, returned about the same.

This is not to argue that REITs are or should be the next big investment everyone rushes into, just as people rushed into large cap stocks and tech stocks in the last three to four years, say Certified Financial Planner practitioners. What it does argue is for the value of being diversified among many different types of assets because you never know what's going to do well from one year to the next. REITs, in fact, have performed poorly the two previous years, 1998 and 1999, while stocks boomed, losing around 25 percent.

Furthermore, investment experts argue that the performance of REITs in 2000 attest to the value of including real estate in some form in the portfolios of many investors. The percentage depends upon the individual investor, but CFP practitioners like a range of 5 to 20 percent of the portfolio. The real estate component doesn't have to be in REITs. You can own real estate directly such as rental property or raw land, for example, or invest in limited partnerships. (The major of investment experts don't consider a residence as a portfolio investment.) However, REITs, or at least the mutual funds that invest in REITs, make it easier for investors to own investment-quality real estate without the headache of locating property and managing it themselves, let alone the challenge of selling it quickly if necessary.

What are REITs? They are corporate entities managed by skilled and sophisticated management teams who invest either in commercial property or mortgages, or a combination.

Equity REITs both own and operate their properties, such as office buildings, apartments, warehouses, hotels and shopping centers. A REIT may concentrate either in a geographic area, in a specific type of property or, have a diversified mix among industrial, commercial and residential properties in various geographical locations.

Mortgage REITs make their money from interest earned by lending money to property owners, often secured by that property. Hybrid REITs invest in both equity and mortgages.

REITs make money from rental income, profits from the sale of the property, ancillary services provided to tenants or a combination. Like mutual funds, REITs do not pay taxes if, under the recent REIT Modernization Act, they pay out at least 90 percent of their net income to their shareholder/investor.

With successful REITs, this results in a stream of income for shareholders. According to NAREIT, current yield for equity REITs is around 7.5 percent, while annual appreciation is around 5.5 percent. Mortgage REITs were spinning off 11.31 percent in yield in December 2000, along with a 2.76 percent price appreciation. This flow of income makes REITs especially attractive to retired investors seeking current income. Investors not needing the current income might prefer to invest in REITs primarily through tax-deferred accounts such as retirement plans and individual retirement accounts.

The combination of income and growth has long made REITs a little confusing for investors to categorize-do they act like stocks, bonds or something entirely different? However one classifies them, many experts note that REITs and typically other forms of real estate investments-don't move in lock step with large-cap stocks such as those on the S&P 500. This negative correlation is why REITs can help diversify a portfolio.

Choosing a good REIT takes some research and involves transaction costs, so some investors prefer to invest through mutual funds where professional managers can choose for them. The mutual fund also provides greater diversification because it invests in many REITs, which can be difficult for many investors to achieve on their own.

February -30- 2001