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Reproduced with permission of the Chicago Tribune
March 18, 2003 Tuesday, CHICAGO FINAL EDITION
SECTION: Business; Pg. 6; ZONE: C
LENGTH: 754 words
HEADLINE: Real estate's fine, but stay on firm ground;
Investors warned not to overdo it
BYLINE: By Eileen Ambrose, Baltimore Sun, Tribune
Newspapers.
BODY:
A prospective client e-mailed financial planner Thomas Grzymala
last month, seeking his advice on building a portfolio of primarily
real estate investments.
Although Grzymala, president of Alexandria Financial Associates
Ltd. in Alexandria, Va., likes some real estate in portfolios, he
warns against putting too much money in it.
"Building a real estate portfolio might seem right for the time
now, but for the long term, anything more than three months, the world
changes," Grzymala said. "Real estate runs in cycles just as the
economy itself runs in cycles."
After being burned by the stock market, many investors are turning
to real estate--in all forms. Planners say they see clients turning
from stocks and leaning toward bigger houses, vacation homes, lake
lots and apartment buildings.
"Just something where they feel it's tangible ownership. 'I've got
something here I can kick, touch and see no matter what happens to the
market,'" said Pat Beaird, president of BHCO Capital Management in
Dallas.
Others are putting money into real estate investment trusts, or
REITs, which own properties and often pay healthy dividends.
Real estate mutual funds, which generally invest most of their
money in REITs, have also seen a rush of incoming cash. Last year,
$3.36 billion flowed into these funds, up from $48 million the year
before, according to AMG Data Services.
Investors like these funds for the dividend income and
diversification, because real estate tends not to move in tandem with
the stock market, said Barry Vinocur, editor of the newsletter Realty
Stock Review. Some investors are just chasing performance, he said.
The Standard & Poor's 500 index lost ground in the past three
years, but real estate mutual funds posted an average annual total
return of 12.9 percent, according to Morningstar Inc.
This pursuit of past performance is what concerns some financial
planners. They say that's the same mistake investors made in the late
1990s, when they overdosed on high-flying technology stocks.
"They think what recently happened is what will happen in the
future, slanting their portfolio to that," said Mark Stadtlander,
president of the Foster Group in West Des Moines, Iowa.
Stadtlander, for example, talked a farmer out of liquidating his
stock portfolio and using the money to buy more farmland, which has
been rising in value. "That's all your eggs in one basket," he said.
Not that financial planners are opposed to real estate.
Indeed, many recommend that investors include real estate in their
portfolio, not counting their home. Some suggest investors should
limit their real estate holdings to no more than 10 percent of their
portfolio.
For those strictly looking at real estate as an investment, experts
generally advise against tying up money in an illiquid property,
especially if the money will be needed within 10 years.
"In stocks and bonds, if there are more sellers than buyers, it's
easy to pull the trigger and get your money," said Barry Glassman, a
financial planner in McLean, Va. "In real estate, it's not so easy. If
there are more sellers than buyers at the time you need your money,
you might take quite a haircut."
Grzymala said he has a friend who is still holding land in Virginia
that he bought a decade ago on speculation that Walt Disney Co. would
build a theme park nearby. Disney bagged the park after stiff
opposition. More liquid investment options for average investors are
REITs and real estate mutual funds, experts said. One reason to like
REITs is the dividend. REITs are required to pay out 90 percent of
taxable income in dividends. The average annual yield now is 7.6
percent.
To be well-diversified, investors likely would need about a dozen
REITs, Vinocur said.
A far easier way to invest in real estate is through a mutual fund,
which typically invests in about 50 REITs, said Dan McNeela, an
analyst with Morningstar. Only one fund may be necessary, he added.
There are 177 publicly traded REITs.
Shop for a real estate fund the way you would choose any other
fund, McNeela advised. For instance, consider expenses that eat away
at returns. The annual expense ratios of real esate funds tracked by
Morningstar range from 0.28 percent of assets to 3.18 percent.
"Anything at 1.5 percent or lower would be acceptable," McNeela said.
Also, look for a diversified fund, and compare its performance with
its peers over the past five years, which would include both weak and
strong real estate markets, he said.
Reproduced with permission of the Chicago Tribune
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