The Empire State building and the skyline of Manhattan. (Photo: Spencer Platt, Getty Images)

What’s the best way to hold commercial real estate in a retirement portfolio? For many investors, the answer seems to be not at all. The reason is that real estate investments have burned people in the past and that stocks get more attention. That’s too bad.

Avoiding real estate is not a good idea. This asset class, appropriately owned, can help support you well in retirement.

Unlike stocks, which trade on a highly efficient and liquid exchange, trading real estate is inefficient and illiquid. The ease of buying and selling stocks is one of the major reasons the asset class is over-represented in most portfolios.

Based on the fascination of the financial press with the stock market, it’s easy to get the impression that stocks comprise the largest financial asset class. According to Matthew Yglesias. author of The Rent Is Too Damn High. the total value of commercial real estate in the U.S. as of December 2013 was $20 trillion. This equals the value of publicly traded stock. (The largest asset class is bonds with $37 trillion.)

While one could make a strong argument for owning equal amounts of real estate and stocks in most retirement portfolios, what’s striking is that very few hold any real estate at all. Certainly, there are good ways and bad ways to own property investments.

Probably the worst way to hold real estate is to own it directly. The only popular retirement plan that allows direct ownership of real estate is the self-directed individual retirement account. Unfortunately, the government discourages holding real estate this way by taxing it unfavorably. As I wrote previously, it’s not a good idea.

Registered limited partnerships were a popular way to own real estate in the 1980s. While someone made money on these investments, I don’t think it was the investors. I don’t know an investor who made a dime, but I do know some distributors and promoters who got very rich with them. The problem wasn’t the real estate but the lack of transparency inherent in a limited partnership. This allowed promoters and distributors to hide high fees and commissions that didn’t give the investors a chance of profiting.

Gradually, the real estate investment trust gained popularity as a better investment vehicle for owning real estate. Most REITs hold investment properties, such as office buildings, hotels and apartments. Their income comes from the rent. (Some trusts are collections of mortgages.)

A publicly traded REIT is similar to an exchange-traded fund, a form of a mutual fund. It trades on the major exchanges and invests directly in real estate. REITs receive beneficial tax breaks, must pass through 90% of their cash flow to investors, have a high degree of transparency and are highly liquid (meaning easy to buy and sell). But they also tend to specialize in vulnerable types of real estate, which can dip in value when hard times arrive. Office rentals, for instance, suffered during the Great Recession. So rather than hold REITs individually, I prefer to own a mutual fund that owns a diversified assortment.

Typically, REITs pay high dividends, averaging 4.1% yearly, double what a 10-year Treasury yields. Lately, REITs have done well for investors. According to the FTSE NAREIT All REITs Index, the category booked a total return (investment gains plus dividends) of 27.2% in 2014, versus 13.7% for the Standard & Poor’s 500 stock index.

The fees and commissions associated with REITs are very low, which helps make them a good choice for investment portfolios. It is also another reason they don’t often show up there, since most financial vehicles are sold, not bought. Mutual funds, annuities and cash value insurance pay much higher commissions to sales reps than exchange-traded REITs.

Wall Street solved that problem by creating the non-traded REIT, which does not trade on a securities exchange and therefore is highly illiquid. The benefits touted by salespeople are the potential for higher dividends, plus lower volatility than publicly traded REITs.

Here’s the downside: Their lower volatility is an illusion that their high illiquidity creates. They also lack transparency, which gives cover to charging high fees and commissions. The non-traded REIT is scarily like its older cousin of the 1980s, the registered limited partnership.

Including real estate in a retirement portfolio can be a good idea as long as the ownership is properly structured. A mutual fund that holds a broad diversification of publicly traded REITS is one way to help you build a strong foundation for retirement.

Rick Kahler, CFP, is fpresident of Kahler Financial Group in Rapid City, S.D. and a member of AdviceIQ. which is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.