Be a Real Estate Tycoon

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So you want to make some money? Consider real estate. After all, as the saying goes, they're not making more land.

Just how much money can you make in real estate? Consider if you'd bought a house in Palm Beach County, Fla., in early 2004 for $250,000 and it experienced average local appreciation. In one year you would have been sitting on a gain of roughly $90,000, or 36%, making your home worth $340,000. If you'd bought a home in Providence, R.I., five years ago, you would have nearly doubled your money by now. A $150,000 home would have given you a $140,000 gain; a $300,000 home, $282,000 extra.

Are you smacking your head now? Kicking yourself? Stop!

It's not too late
You can still invest in real estate and make good money doing so, but you should keep some things in mind. For starters, it's good to know that markets that have been the hottest in recent years are often the ones most vulnerable to a downswing. Many markets these days, such as those in Palm Beach County and Rhode Island, are already experiencing a slowdown.

If you're planning to buy a new home, make sure you do your research first -- perhaps starting at our Home Center. And if you're looking to buy property as an investment, think twice. I wrote an article a while back -- and a follow-up -- on the pitfalls of being a landlord.

Another road to Rome
Another option to consider is real estate investment trusts, better known as REITs. These are organizations that combine the capital of many investors to acquire or finance all kinds of real estate, such as offices, hotels, shopping centers, and apartments. A REIT is a little like a mutual fund focused on real estate. Like a fund, its portfolio is professionally managed and diversified and holds many properties. REITs typically trade on major stock exchanges.

But REITs are also unique in many ways. For starters, corporations or trusts that qualify as REITs generally don't pay federal corporate income tax and are often exempt from state income tax, too. They're required to invest at least 75% of their assets in real estate and pay out at least 90% of their income as dividends. In good years, REIT dividends can run quite high, sometimes topping 10%.

REITs have been on a tear in recent years. Over just the past 12 months, for example, the SNL Financial Equity REIT Index and the MSCI U.S. REIT Index both advanced by around 16%, and the NAREIT Index climbed by 19%. How did the Russell 3000 do in that period? It managed just 2.75%. The S&P 500? A paltry 2%.

You can learn more about REITs on our REITs discussion board. Folks there launched a stock-picking contest for 2006. You can see for yourself by trying out our discussion board community free for 30 days; when you're there, you'll learn about many community-recommended REITs, including Ventas, AMB Properties (NYSE: AMB), Host Marriott (NYSE: HMT), Avalonbay Communities (NYSE: AVB), Developers Diversified Realty (NYSE: DDR), and General Growth Properties (NYSE: GGP). Among other topics, board denizens are also discussing which REITs qualify as blue chips.

Another option is to take advantage of a free trial to our Motley Fool Income Investor newsletter service, where dividend expert Mathew Emmert recommends two high-dividend investments each month. His recommendations include a bunch of REITs. The total average return of the newsletter's picks -- regular common stocks and REITs, mostly -- is 13%, versus 7% for the S&P 500. In addition to REITs, you'll find some familiar names among Mathew's recommendations, such as Johnson & Johnson, and some less familiar ones, such as France Telecom. More than 20 companies on the list recently sported dividend yields above 5% and 13 had yields topping 7%. One recommended REIT, Equity Inns (NYSE: ENN), has advanced by a remarkable 53% in about a year and a half, and its dividend yield was recently around 4%.

Here's to a happier portfolio!

Selena Maranjian owns shares of Johnson & Johnson. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.