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Real Estate Rx

Lately, trying to build steady savings has felt like struggling to stay upright on a storm-tossed ship.

One way to keep your savings balance from tumbling with every stock market swing, say financial experts, is with real estate.

Say what? Hasn’t real estate been at the center of this economic malaise, because millions took on high-priced mortgages to buy homes?

True enough. But the kind of real estate planners are advising “doesn’t have anything to do with single family homes,” notes Jorie Johnson, a Manasquan, N.J., financial planner.

Rather, this real estate includes apartment buildings, shopping centers, nursing homes and offices, gathered together in a real estate investment trust – REIT.

An informal poll of members of the National Association of Personal Financial Advisers, a group of fee-only advisers, finds that they are nearly unanimous in recommending that REITs be part of clients’ portfolios, particularly in retirement accounts.

If you’ve never consulted a financial adviser, you may have never heard of REITs.

Here, some pros share why they like tucking a little bit of real estate into savings.

A Stock That’s Not

A REIT is a company that owns – and also may manage – all types of “income-producing” real estate, like shopping centers, apartments, office buildings, even nursing homes.

Many REITs are public companies, meaning that their shares are traded on a stock exchange. But because REITs are not in the business of selling cars, cereal, computers or any of the myriad products sold by companies traded on the stock exchange, they are a “good diversifier,” observes Kevin Brosious, a planner in Allentown, Pa.

That means that when the S&P 500 or other stock indexes move up, REITs may move down, and vice versa. That diversion, along with the relatively hefty dividend or income REITs deliver, help stabilize your savings balance.

However, REITs don’t always move in the opposite direction of stocks. “In the credit crunch [of late 2008 and early 2009] everything went down, except U.S. bonds,” notes Brosious. During the 10-year period that ended this Aug. 31, 2011, the FTSE NAREIT Equity REIT, which is a broad index of publicly traded REITs holding a variety of properties across the U.S, averaged a 9.9 percent annual return, including the reinvestment of dividends. For the five-year period ending this past August, the FTSE NAREIT Equity REIT averaged a .23 percent annual return.

A REIT That’s Right

While many specialized REITs – like those composed only of shopping malls – exist, the typical investor who’s building retirement savings doesn’t have the funds to stack lots of specialized REITs in his portfolio.

“I prefer many clients to hold a Vanguard REIT index exchange traded fund,” says Lee Munson, an Albuquerque, N.M., planner. With such a fund, investors own an array of property types, he adds.

Moreover, some specialized REITs, such as mortgage REITs and REITs that are not traded on public stock exchanges, carry too much risk for the typical investor, say planners.

And, Munson and other planners generally advise keeping only a small portion – 10 percent or so – of a total portfolio in REITs.

A Tax That’s Not Taxed Now

By law, REITs must pay out at least 90 percent of every dollar of their income in dividends. Thus, the yield is relatively high on REITs.

Often, a holder would have to pay tax on those dividends at his ordinary income tax rate. That’s why planners like to see REITs held in tax-advantaged retirement accounts, so that dividends will only be subject to tax when the funds are eventually withdrawn.

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