Most Americans own homes, but having a single property or a few rentals doesn’t offer true real-estate diversification. REITs are relatively inexpensive options for rounding out a portfolio.

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For most Americans, owning a single home or just a few rental properties doesnt provide ample diversification across the real estate market. Real estate investment trusts offer an easy and relatively inexpensive way to gain broader exposure. REITs vary by property type and geographic focus. REITs have performed well in the stock market in recent years. Most also pay attractive dividends, yet REITs arent as conservative as bonds.

Nearly two-thirds of Americans are homeowners, and for many people their dwellings are the biggest investments they own. But does this make the vast majority of homeowners real estate investors in a broad sense? Not really.

Homes clearly are investments, but they’re also places to live. They require ongoing expenses for maintenance, repairs and property taxes. They aren’t very liquid and can’t be accurately valued, in real time, without a sale or appraisal. All this differentiates homes from stocks, bonds, mutual funds and other standard investments.

Besides, owning a single home, or even a couple of rental properties, doesn’t provide anything resembling a diversified stake in real estate, not when you consider all of the different geographic areas across the U.S. — and the many property types.

It’s like owning one stock and saying you’re diversified across the stock market, said Allan Flader, an investment adviser at RBC Wealth Management in Phoenix.

This is where real estate investment trusts, or REITs, come in. They’re an easy, inexpensive way to broaden your real estate exposure beyond one or a few parcels. They can be of special merit for the many Americans who rent — now around 36 percent of households and rising.

REITs are special corporations whose shares trade on the stock market. REITs invest in real estate and typically specialize by property type — apartment buildings, medical centers or shopping malls, for example. Many take a regional, national or global focus.

REITs have been in the news over the past week with word that Simon Property Group is seeking to acquire rival Macerich Co. Both are among a half-dozen sizable REITs that focus on shopping centers — an especially strong sector coming out of the recession.

In Arizona, Simon owns shopping centers including Arizona Mills in Tempe and Phoenix Premium Outlets in Chandler. Macerich has an even more extensive mall portfolio here that includes Scottsdale Fashion Square, Chandler Fashion Center and Arrowhead Towne Center. Arizona also is home base for other types of REITs, including Healthcare Trust of America, Spirit Realty and Store Capital.

One defining characteristic of REITs is that they tend to pay sizable dividends in the range of 2 percent to 5 percent. In part, this reflects rental income as a key source of revenue. In addition, special rules allow REITs to avoid paying federal income taxes as long as they distribute nearly all of their income to shareholders as dividends. Both factors support dividend yields.

Yet despite high yields, REITs aren’t as stable as bond prices. In theory, those hefty dividend payments should dampen wild price swings for REIT shares during volatile markets, but that doesn’t always happen. The typical REIT slumped 37 percent in 2008, for example.

Dividend-paying stocks, including REITs, are not substitutes for bonds, noted Joe Davis, chief economist for the Vanguard Group,in a blog.

REITs also can’t be counted on to provide short-term protection against inflation, Davis said, although REIT returns, and those of stocks generally, have substantially outpaced inflation over longer stretches. How REITs respond to economic cycles varies in part by property types. For example, REITs owning lodging properties could quickly feel an uptick in the economy because higher travel demand could push up hotel rates almost overnight, Flader said. But a REIT focusing on highrise office buildings might take years to collect higher rents as leases eventually expire and come up for renewal.

REITs aren’t the only ways to own real estate. You also could buy homebuilder or developer stocks, or you could purchase an office property or shopping mall directly, as pension funds and other institutional investors do. But assuming you want a diversified slice of multiple properties and don’t have millions of dollars to work with, REITs might be the answer.

Rather than try to pick out the most promising REITs, another option is to select from among the dozens of real estate mutual funds or exchange traded funds that diversify within real estate. Flader suggests holding anywhere from 3 to 8 percent or so of your portfolio in REITs or real estate funds.

The sizzling performance enjoyed by REITs is reason to be somewhat cautious. Over the past 20 years, REITs have generated an average total return including dividends of 10.6 percent a year, compared to with 9.3 percent for the Standard & Poor’s 500 index, according to a favorable report on REITs by A.T. Kearney, a management-consulting firm. (Those figures are for equity REITs that own and manage properties. A more conservative REIT category invests in mortgages.)

The economic backdrop generally has been favorable for REITs, including steady growth and low interest rates that have allowed companies to refinance debt. Meanwhile, uncertain growth prospects have kept a lid on new construction. All those factors have helped REITs but might not repeat to the same degree in the future, according to researcher Morningstar.

While REITs aren’t cheap, the same also can be said of stock and bond investments generally. Just about everything is trading about their historical averages, Flader said.

If you have stock-market holdings, especially through broadly diversified mutual funds, you likely have some exposure to REITs and real estate stocks already. Assuming you want more, there are plenty from which to choose.

Your home might be a great place to sleep, watch TV, swim or cook a meal. But it’s only one sliver of a much more expansive real estate market.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

REIT leaders

Here are some of the most valuable real estate investment trusts specializing in different areas of the property market. Capitalization refers to the value of each company’s shares in the stock market.