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Tickers in this Article: IYR, RWR, FIO, SLG, O, WAG, SRS, IAT, ICF
Real estate is once again becoming a darling of Wall Street. A mixture of economic and market conditions are converging to make them an excellent option for a portfolio. A combination of low interest rates, available capital and depressed real estate prices have institutional investors flocking to the sector. Retirees in search of inflation protection in real assets and high dividend potential have helped prop up prices. With many analysts calling for the bottom in real estate prices, now may be the time to add real estate to your portfolio.

IN PICTURES: 5 Simple Ways To Invest In Real Estate

The REIT Time
After being of the hardest hit sectors in the global credit crisis, real estate seems to be pulling itself out of the basement. According to Lipper, funds that invest in real estate and REITs fell 39.7% in 2008. However, in 2009, the sector rallied 30.4%. This rally has continued through 2010 and many analysts believe the sector could see additional gains as the any sort of economic recovery takes hold.

The U.S. economy expanded 2% in the quarter ending in September. This was the fifth consecutive quarterly increase in GDP. With this increase, office vacancies have declined for the second straight time in the third quarter and now sit at just 14.7%. Similarly, apartment vacancies are a low 7.2%, and both office and residential rents have stabilized - 2011 promises to be a year of increasing rents.

In addition to the improving economy, REITs are benefiting from low interest rates. Many have been able to refinance debt or issue equity and use that capital to buy property at cheap valuations. According to the National Association of Real Estate Investment Trusts, REITs completed $21.2 billion in secondary sales last year, the most since 1992. Many apartment REITs have been purchasing empty condos at 50 cents on the dollar and renting them out. With the second round of quantitative easing beginning, interest rates should continue to stay low for some time. Domestically, QE2 has had investors flocking to REITs over the past few months looking for real asset plays to protect against inflation and retirees are attracted to the sector's large dividends. Foreign investors are also looking at U.S. real estate, which has become attractive as the dollar falls against other foreign currencies due to easing.

Become Your Own Property Baron
With the real estate market beginning to show some signs of improvement, the time maybe right to add the sector to a long term portfolio. The sector's high dividends and inflation protection make it ideal for a position in today's market. Broad bets such as the iShares Dow Jones US Real Estate (NYSE:IYR) or SPDR Dow Jones REIT (NYSE:RWR) make it easy to add diversification across the entire sector.

With office rents in most major markets continuing to rise, investors may want to focus their attention to REITs in that area. The iShares FTSE NAREIT Industrial/Office (NYSE:FIO) holds nearly 65% of its assets in office REITs such as SL Green (NYSE:SLG). The fund should do well if the economy picks up any sort of a pace. Shares of the ETF have an SEC yield 3.29% and charge 0.48% in expenses.

Companies that focus on free-standing real estate are also doing well. A drug store such as Walgreen's (NYSE:WAG) will construct a store, sell it to a portfolio manager and lease it back. These sale-lease back transactions result in long 10 to 15 year leases and a steady stream of dividend payments. Offering a geographically diverse portfolio of free standing real estate, Realty Income (NYSE:O) is a possible play.

Real Estate Hedge
Despite all the bullish news in favor of real estate, many analysts are pointing to the
$58.3 billion worth of commercial-mortgage loans that are currently delinquent as a sign of more pain to come. Investors can add a hedge to their real estate portfolios with the ProShares UltraShort Real Estate (NYSE:SRS) or go short the iShares Dow Jones US Regional Banks (NYSE:IAT). Smaller regional banks have been the most hurt by souring construction and real estate loans.

Bottom Line
While real estate was one of the hardest hit sectors in the global credit crisis, today it is making a rebound. The right combination of high inflation expectations, low interest rates and a flood of deals has made the sector a portfolio must-have once again. High dividends and the flight to real assets should help prop up REIT prices for some time. The previous ETFs along with Realty Income are some examples of bargains in the sector. (To learn more, see 5 Types Of REITs And How To Invest In Them.)

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