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 7 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 it might be due for a swoon. That means you need to be very careful these days when you're picking real estate investment trusts (REITs) 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 2005. The Vanguard REIT Index Vipers is up more than 25%, General Growth Properties (NYSE:GGP) is up 40%, Developers Diversified Realty (NYSE:DDR) is up 28%, and ArdenRealty (NYSE:ARI) is up 30%. These gains represent further strong performance in a five-year boom that has left the average REIT yield around 5%. General Growth, Developers Diversified, and Arden now yield 3.5%, 4.5%, and 4.5%, respectively, and trade for substantially more than the market's average of 17 times earnings. That's not optimal, given the volatility of the current environment.

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 excluded from the current boom are mortgage REITs, which have been squeezed by rising interest rates and a flattening yield curve. American Home Mortgage Investment (NYSE:AHM) was down nearly 10% at one point this year, and Luminent Mortgage Capital (NYSE:LUM) was down nearly 50%. But even they have been springing back to life recently as long-term rates have finally started to rise.

Tread carefully
While I don't think the real estate sector is on the verge of collapse, I do think investors need to be wary of where they put their money. Stay away from REITs that do most of their business in the aforementioned "hot" areas. Arden Realty, for example, operates primarily in Southern California. Investors can do better by focusing on companies that control small niches across the country or do business in places where the premium on real estate is lower.

Foolish final thoughts
Fool dividend guru Mathew Emmert continues to recommend three REITs that meet those criteria and offer yields greater than 6%. These select opportunities take a little bit of digging to discover. If you'd like to know where you can get an above-average yield for a below-average price, click here to be our guest at Income Investor free for 30 days.

Real estate exposure is vital to a balanced portfolio. But remember: The best investors never overpay.

This article was originally published on Dec. 15, 2005. It has been updated.

Tim Hanson does not own shares of any company mentioned in this article. No Fool is too cool for disclosure ... and Tim's pretty darn cool.