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 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 2005. The Vanguard REIT Index Vipers
Moreover, approximately 20% of purchasers in the current market (now softening) 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.
Left out recently are mortgage REITs, which have been squeezed by a flattening yield curve. Annaly
Tread carefully
I don't think the real estate sector is on the verge of collapse, and with the yield curve getting steeper again, mortgage REITs such as Annaly and 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
Fool analyst Mathew Emmert focuses on finding REITs and other select dividend 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 Motley Fool Income Investor. You'll enjoy access to all of our best ideas and research.
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. Annaly Mortgage is a Motley Fool Income Investor recommendation. At the Fool, no writer is too cool fordisclosure... and Tim's pretty darn cool.