Invest in Real Estate? Are You Nuts?

Nobody has to tell me that the real estate market is in a deep hole. My house has been on the market for months. Trust me, I know how bad things are.

We've had many lookers but no buyers, despite a whole string of price cuts from what we thought was a value price back in April. It's a really nice house in a really nice town, and two years ago it would have taken us a week, max, to get a serious offer.

I know I'm not alone -- lots of other houses in my area, and all across America, have been on the market for a long time. My misery has plenty of company.

It's ugly out there, and as the cracks in the economy grow more apparent, that ugliness is spreading to commercial real estate as well.

Retail chains -- from mall staples such as Talbots (NYSE: TLB) and Gap (NYSE: GPS) to big-boxers such as Pep Boys (NYSE: PBY) and Home Depot (NYSE: HD) -- have announced cutbacks and store closings in the past year. Layoffs in banks and law firms and other blue-suit businesses mean less demand for premium office space -- lots of leases won't be renewed, and many that are will bring in less money.

Things could still get a lot worse -- and when it comes to commercial real estate, it almost certainly will.

So, naturally, I'm suggesting that you buy.

Dude, what is wrong with you?
Nope, I didn't overdose on cold medicine this morning, and I haven't completely lost my marbles. I'll explain in a bit. But first, a quick crash course on REITs.

Real estate investment trusts are legal entities that own (surprise) real estate. Many have shares that are publicly traded on stock exchanges. By law, a REIT must distribute at least 90% of its taxable income to shareholders, and that law -- and the resulting fat dividends -- means that the best REITs are popular investments when things are good.

As we noted, however, things aren't good. As a category, REIT stocks have been sold off hard in recent weeks. Many REITs, including big names such as warehouse owners ProLogis (NYSE: PLD), have cut or suspended dividends. Others, including retail space owners General Growth Properties (NYSE: GGP) and Developers Diversified Realty (NYSE: DDR), have seen huge share-price drops as they've stumbled financially. Many investors have bailed out of REITs entirely.

Are you starting to see the opportunity yet?

Gems in the rubble
"Commercial real estate" as a broad category is headed for hard times. But within that broad category are some potential exceptions. Rental housing (all of those people who aren't buying my house have to live somewhere), self-storage, and health-care properties could hold their ground through the recession, and REITs holding those kinds of properties should be better able to sustain their dividends. To the extent that they were sold off with the more vulnerable REITs in recent weeks, they should also recover some of their value.

Finding the best of those REITs is the opportunity. But it's not an easy one to jump on directly. Understanding a big commercial real estate REIT involves understanding not just commercial real estate generally, but also business conditions in the subcategory and region(s) in which the REIT operates. It's a complicated challenge for those new to the sector.

Fortunately, hiring expert help is simple.

What to buy right now
Amanda Kish, our Foolish mutual fund guru, has been thinking about this challenge as well. In the new issue of the Fool's Champion Funds newsletter service, available online at 4 pm ET today, she explains the opportunity in more detail -- and she identifies three mutual funds that are well positioned to take advantage.

Actively managed mutual funds have their ups and downs, of course, but the best have veteran managers, low fees, and a track record of outperformance through a variety of market conditions. All three of the funds Amanda has looked at this month pass those tests with flying colors, and one in particular -- the third one listed in her article -- looks like a real winner to me.

Long story short, I think these funds are the best way to take advantage of this opportunity right now. Want to check them out? A free trial of Champion Funds is yours for the asking. In just a few seconds, you'll have a full 30 days of unlimited access to the service, with our compliments. There's absolutely no obligation to subscribe.