KEEPING YOUR REAL ESTATE EXPECTATIONS REALISTIC.

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Author: Kiviat, Barbara

Money

Real estate investment trusts--stocks that invest in properties like apartments and office buildings--were up more than 30% last year, the second year in a row for such stellar returns. That was thanks in part to low interest rates and strong demand for office space. Investors attracted to the healthy dividends REITs pay also have been piling in, and more and more retirement plans, such as 401(k)s, have begun offering REIT mutual funds. But after the big run-up, this may be the year the go-go party ends. "In the long term, returns from REITs have been comparable to returns from stocks," notes David Carmichael, an investment adviser in Scottsdale, Ariz. Indeed, analysts and money managers project that REITs will return more along the lines of 8% to 10% in 2005; if interest rates rise dramatically, the figures will be even more modest. Still, no matter what happens in the short term, REITs can play a valuable role in any portfolio. Since they don't move in synch with bonds or even many stocks, they provide diversification in uncertain times. Many financial planners suggest keeping about 5% of your total portfolio in REITs or REIT mutual funds. One recommended by fund tracker Morningstar: T. Rowe Price Real Estate.

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By Barbara Kiviat