Building Bargains: Why REITs Look Attractive: CLI, OFC, ACB, EQR,

Mortgage rates are at historic lows and house prices have tumbled, but for the majority of Americans who already own homes, the best real estate deals might be in shares of professionally managed property portfolios.

The 30-year mortgage rate is near 4%, the lowest level in 40 years of records, according to Freddie Mac. Despite such cheap financing -- and a smorgasbord of government perks to lure homebuyers -- the bargains have only gotten better: The S&P/Case-Shiller Home Price Index has fallen by nearly a third over five years.

But as investments go, single-family houses aren't ideal. They typically pull in less rent and generate more expense per square foot than multifamily or commercial property, say professional real estate investors.

The good news is that deals have gotten better in managed property portfolios, too. Real-estate investment trusts, or REITs, mostly buy property, and they avoid paying taxes on their income so long as they pay the bulk of it out to shareholders as dividends. Investors buy REITs as they would regular stocks.

REITs have taken a pummeling recently: As of Thursday, the MSCI U.S. REIT Index had declined 19% from its July 22 peak -- worse than the 14% drop for the Standard & Poor's 500-stock index.

That's an opportunity, says Kevin Beddell, manager of the JPMorgan U.S. Real Estate fund (SUSIX). "It's a Goldilocks situation, with low interest rates but also strong demand and tight supply," he says, "and we've had a nice correction, so now prices are attractive, too."

REIT investing can be tricky, however, because the portfolios can specialize in a vast array of real estate properties, from hotels to corporate data centers.

One way for investors to evaluate different portfolios is to compare lease periods for the properties they hold. When leases are short, cash flow changes more quickly in response to economic conditions, for better or worse. When leases are long, the investments are usually steadier.

That puts hotel REITs at one extreme of the universe, because their "leases," or room bookings, often cover only a night or two, and health-care facilities near the other end, because their leases often last 10 or 15 years, according to Mr. Beddell. In between are multifamily housing (typical lease: one year), industrial warehouses (three to five years) and shopping malls (seven to 10 years, longer for department stores).

As with any investment, the most popular parts of the market aren't necessarily where the best opportunities are to be found. Office space in the central business districts of New York City, San Francisco and Washington, D.C., is in strong demand, but many REITs focused on such properties have dividend yields of only 2% to 3%.

Mr. Bedell prefers high-quality suburban office property, which offers more income for the price. "It's not quite as prized as property in city centers," he says. "But the discounts in the suburbs are overdone right now."

Among Mr. Beddell's favorite REITs is Mack-Cali Realty (CLI: 26.75, -0.44, -1.62%), based in Edison, N.J., which has diversified property on the eastern seaboard and offers a dividend yield of 6.4%. It's a stable portfolio and the company is able to borrow at attractive rates, he says.

Another is Corporate Office Properties Trust (OFC: 21.78, -0.65, -2.90%), based in Columbia, Md., whose shares have lost 28% since the end of June, perhaps because of the portfolio's focus on government tenants, especially in the defense field. Investors fear defense spending cuts, but the REIT is focused on information technology tenants that are better protected than weapons makers from cuts, according to Mr. Beddell. The dividend yield is 7%.

Multifamily housing is also well positioned, says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods. With the single-family market having tanked, there's "huge negative sentiment" toward buying a home, he says. Each 1% drop in the homeownership rate brings more than a million new renters, he estimates, and supply hasn't kept pace. What's more, the population of 20- to 34-year-olds, a key renting demographic, is swelling, says Mr. St. Juste.

Mr. St. Juste recommends shares of AvalonBay Communities (AVB: 114.05, -4.35, -3.67%) and Equity Residential (EQR: 51.87, -1.72, -3.21%), which focus on pricey coastal areas like New York, D.C. and Seattle, rather than "sun belt markets, where the jobs don't offer a lot of pricing power for landlords." (Also read, 'ETFs for Operation Twist.')

Health care REITs could offer opportunities as well. Worries about Medicare cuts hurting tenants have turned investors off, but there are two reasons why shares might perform better than expected. First, REIT managers usually require that tenants earn much more than they need to cover their rent, so lower profits wouldn't necessarily change the cash flow on the real estate. Second, property owners are in a good position to help healthcare operators reduce costs -- for example, by combining more operations into a given space.

Mr. Beddell points to HCP and Ventas as good buys. Both have diverse portfolios that include labs, office space, assisted living facilities and more. HCP has the higher yield, at over 5%.

Of course, for investors who don't yet own homes, and who live in markets where prices have plunged, a house purchase might be a better deal than a REIT. The U.S. homeownership rate recently hit a 13-year low. Americans seem newly skeptical of the notion that homeownership is always a great investment -- which is as good a sign as any that it's once again a pretty good one.