A fed-up landlord finds a tidier way to own real estate

Back in 1996, when everyone else was piling into Enron and Lucent, I discovered REITs (real estate investment trusts).

At the time, I owned a house with a rental unit in a small city in upstate New York, so I thought a REIT that specialized in apartment units was an investment I understood. (I remembered that Peter Lynch's book said understanding the business you bought stock in was prudent.) I got a hot stock tip from my sister about a local REIT and bought 300 shares. (Didn't Mr. Lynch also say something about advice from relatives?)

While the rental unit's leach line clogged up, the bathroom floor rotted out, and the roof began to leak (repaired at a cost of several thousand dollars), the dividends from my apartment REIT rolled in steadily. The price rose from $20 to $25 to $35 dollars a share.

I finally sold the property after eight years of ownership – for about 20 percent less than I paid for it – and promptly re-invested in additional REITs.

You won't get rich quickly, but even at today's prices, this investment sector could be worth a look. REITs pay dividends. My widowed mother used to invest in stocks with dividends. I always thought that was a good idea.

REITs are considerably less volatile than many other stocks. They perform as public utilities used to back in the good old days before deregulation. And their price movements show a low correlation with many other sectors of the market, so they often zig when the rest of the herd zags.

That makes a welcome diversification for conservative investors like me who require or desire less volatility in their portfolios. Even growth-oriented investors can use REITs as DRIPs (dividend-reinvestment plans).

Despite my pretty awful financial track record with real estate, I remain enthusiastic about REITs and have added three more to my portfolio. Hundreds of them are traded on the major exchanges, so here in the Rust Belt, I can invest in the sunny South or in the ever-prosperous suburbs of Washington, D.C.

Individual REITs are usually geared to one of many types of real estate – self-storage units, apartment complexes, prisons, hospitals, timberland, shopping malls, or hotels. They can all be bought online with the click of a mouse button. No septic tank inspections or land surveys required. And I have yet to deal with a clogged toilet or an eviction from either of my apartment REITs.

You can also buy mutual funds that buy an assortment of REITs and watch them for you.

REITs do have a downside, as almost every investment does. These are stocks, so there is nothing to prevent stupid or greedy management from driving the company into bankruptcy.

Although REITs do own "hard" assets, they are not immune to the effects of inflation and rising interest rates. (They rely heavily on loans to finance their acquisitions and upgrades.) And they do complicate your tax return when you sell them because they pay both dividends and up to four kinds of capital gains.

Another drawback to REITs: Right now a lot of other folks have recently bought them. All four of mine are at or near their 52-week highs. If that's reason to steer clear, maybe you can find a fixer-upper in a neighborhood that is "just starting to come back."