If you watch any TV, you've probably seen the infomercial about making a million in real estate. Google "real estate millionaire" and you'll get more than 4 million hits. And over the past five years, the value of residential property in developed countries has more than doubled, according to The Economist. You know you want a piece of that action.
Unfortunately, real estate is historically no better a sector for investment than any other and might be due for a swoon. That means you need to be very careful when you're picking real estate investment trusts (REITs) these days for your portfolio. Many of the current valuations are overblown.
A fantastic run
For the most part, REITs are up significantly since the beginning of the year. The Vanguard REIT Index Vipers
Moreover, approximately 20% of purchasers in the current market are speculators or multiple-home buyers. These folks are inflating demand, particularly in San Diego, San Francisco, New York City, and Washington, D.C., and making the operating environment more expensive and more difficult for the REITs you know and love.
Recently left out of the current boom are mortgage REITs, which have been squeezed by rising interest rates and a flattening yield curve. Annaly
I don't think the real estate sector is on the verge of collapse, and I continue to hold shares of another mortgage REIT: Thornburg
That's not the best deal. Investors can do better by focusing on companies that do business in places where the premium on real estate is less or that control small niches across the country.
Foolish final thoughts
In the last issue of Motley Fool Income Investor, Fool dividend guru Mathew Emmert identified a small-cap REIT that currently trades for less than its net asset value. It also has a greater than 8% yield and trades for only 17x earnings. And in the issue that releases today at 4 p.m. EST, Mathew identifies a $200 million REIT with a 7% yield that trades for 15x earnings. These are select opportunities that take a little bit of digging to discover. So if you'd like to know where you can get an above-average yield for a below-average price, click here to take a free trial to Income Investor. You'll enjoy access to the new issue, as well as all the issues in the archive, as soon as it's released. Or subscribe and take home a free copy of The Motley Fool's Stocks 2006 report, which features 12 great investing ideas for the year ahead.
Real estate exposure is vital to a balanced portfolio. But remember: The best investors never overpay.