REITs (pronounced "reets") own apartments, office buildings, shopping centers, hotels, warehouses, and even nursing homes or racetracks. A few REITs make and hold mortgage loans. REITs are a convenient way to invest in commercial real estate -- no late night calls from tenants -- and are also one of the tried-and-true ways to smooth out the risk of an investment portfolio.

REITs are called trusts but trade like stocks, with more than 100 of them on the New York Stock Exchange or Nasdaq. They exist primarily to pay income to individual investors. By law, to avoid heavy taxes, a REIT must pass through almost all of its income as dividends to the shareholders.

How REITs pay off

Since there is more risk to own an office building or a mall than a government bond, expect the dividend yield on a real estate portfolio to be higher than that of a Treasury. As of early August, the average REIT yielded 7.1%, with some of them above 10%.

Besides the yield, REIT total returns also reflect movements in share prices as real estate assets gain or lose value. Since property values swing up and down, REIT returns are cyclical. In 1998, REIT investors suffered a dreadful 18.9% loss on average even though the economy and the overall stock market were thriving.

REIT analysts at the time claimed the trouble was that investors wanted to own technology stocks and dumped real estate holdings indiscriminately. But if you average it out over several years, REITs are not high-risk investments. The last ten years show an average annualized return of 11.1%. That's more than government bonds, but less than stocks.

Research by the firm Ibbotson Associates, which is known for calculating stock and bond returns versus inflation, shows that REITs usually have a calming effect on a diversified investment portfolio. Ibbotson says the correlation between REIT performance and the broad stock market is low and getting lower as REIT shares gain value even as the economy slumps and many other stocks sink.

Where to invest

Three of the largest and best-known REITS are Equity Office Properties (CPT) in residential property. EOP owns hundreds of major office buildings, spread across every major city and most important suburban areas. It yields 6.7% and while it is down 2% for the year, it is up 15% since early May.

Simon is the biggest mall owner in America, with about 250 properties, from small strip centers to Minnesota's gargantuan Mall of America. It yields 7.1% and has returned 28% so far in 2001. Camden Property Trust owns or manages more than 51,000 units in all regions of the country. Its year-to-date return is 17% and the dividend yield is 6.3%.