WHY shouldn't I INVEST IN REAL ESTATE INSTEAD OF STOCKS?

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Author: Nash, Jeff

Thanks to years of residential and commercial real estate appreciation in most of the country, owning investment property does look like a tempting alternative to the scary stock market. Indeed, for individuals particularly suited to owning property--people like the the Harrises, who are profiled on page 99--the hard asset part of their portfolio has been a godsend. That said, most investors need to consider carefully the special complications of owning rental or commercial property. Among them:

• Real estate is nondiversified and illiquid. When you buy a building or a plot of land, you're pouring a lot of money into a single position--far more than you likely would in a single stock or bond. What's more, you may have to be willing to live with that investment for a long while. Unloading real estate takes a lot longer than dumping a stock or a fund.

• Owning investment real estate is owning a business. For some, that's a plus, because it means they can influence the value of their investment more than they could with, say, their Intel stock. But are you ready to screen potential tenants, collect rent, toss out deadbeats and do some of the building maintenance yourself? In other words, do you want to be a landlord? Not everyone is cut out for that job.

• Tax breaks are not all they're cracked up to be. True, you can deduct mortgage interest, property taxes and operating expenses on rental properties, but first you have to dig into your own pocket to pay them. Depreciation is the only noncash deduction allowed.

• Bad timing. The best time to invest in real estate is when interest rates are high, buyers are scarce and prices are depressed--all things that are not true now.

• If you're still determined to invest in real estate, consider REITs, or real estate investment trusts. These companies own baskets of commerical properties and pay out at least 90% of their rental income in dividends. Be selective, as REIT prices have risen substantially this year, and some analysts think they are starting to look overvalued. A couple that still look promising: Vornado Realty Trust (VNO) and Equity Office Properties (EOP).

EBSCO is reproducing the article exactly as it appears in the magazine.

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By Jeff Nash