With stock markets faltering and some investors’ hearts still smouldering with the bitterness of the 2002 crash, more and more people are turning to real estate as a sure investment bet. The National Association of Realtors reports that last year about 1.8 million homes were bought in the US for investment, almost one-fourth of all home purchases. Eighty percent of property investors rent out the homes they buy, while the rest prefer to make quick renovations and sell their property, a tactic called flipping.

Real estate as investment has many attractions. First, the common knowledge tells you that property prices go up all the time, while stocks are much more volatile. However, there is no guarantee that property appreciation will continue indefinitely. The presence of a vast number of speculative investors in the market is an ill-boding sign, as well as the skyrocketing prices that rush ahead of wage growth and inflation rates. Analysts have been mulling over the possibility of a housing bubble, and almost everybody agrees that temporary retreats in prices are to be expected in some neighborhoods, especially in places where price growth has been so robust that it began to depress the local economy.

Besides, owning real estate gives one tax breaks as mortgage payments are usually tax-deductible. However, managing one’s rent income will require sophisticated tax policies. You may want to place most of your property-related funds in tax-deferred accounts.

Real estate ownership poses some specific problems. Being a landlord is not as easy as it seems. You might end up with tenants who skip on the rent and have to keep a certain amount of cash on hands to stay ready to meet unexpected challenges, such as a leaking roof or a clogged toilet. Property management is no small feat if you undertake it yourself, and property management companies typically charge from 5 to 10% of the rental income. Even worse, you may not find those tenants at all if vacancy rates in your neighborhood are approaching critical levels. If mortgage rates are low and home prices affordable, you may not be the only one who decides to buy a house. Or the rent you would like to charge to turn in a healthy profit can be too high compared to the average rent level.

That is why you need to do thorough research followed by math calculations before choosing to invest in real estate. You need to look at the rents in the area where you are about to buy a home and compare them with your expenses, such as mortgage payments and maintenance expenditures. The cash flow that results from the subtraction of expenses from rental income should be positive and enough to compensate the down payment you made on the mortgage. Sometimes investors accept negative cash flows in the first years, expecting their losses to be offset by property appreciation, but this is hardly the best strategy.

The bad news is, you might be late for the real estate market. Professionals claim that the best time for investment was about three-five years ago, and by now the prices have jumped to the levels at which it might make sense to hold your house for a while instead of flipping.

If you do not want to weather all those risks on your own, there are other ways to obtain exposure to real estate without owning it directly.

You can invest in a Real Estate Investment Trust which is essentially a corporation or trust that combines the capital of many investors to purchase and manage income property. REITs, like equities, are traded on exchanges and are highly liquid. It is the liquidity that makes them stand out against direct real estate ownership. Overexposure to property makes one vulnerable to downturns in this market as these assets are much harder to dispose of than stocks or other exchange-traded financial instruments.

Another option is to invest in a mutual fund that buys many REITs or a managed real estate pool. REITs posted an impressive return of 30.4% in 2004, ahead of many stock indexes.

Real estate pools are a relatively new product that does not use leverage and is broadly diversified, having usually a very low standard deviation, at about the level of one-year treasury bills.

Even under the leadership of professional managers you need to remember that as interest rates rise, fewer people will be able to afford homes, and consequently, prices are destined to fall sometime in the future. Another reason they might fall is the increasing popularity of adjustable-rate mortgages the rates on which are bound to rise in the future. The landing can be a soft one though, which means you will be able to cash in the returns on your investment. Or you can end up with a rapidly depreciating piece of property on your hands.

What is the bottom line? There is no golden mine in real estate investing. But using reason and professional advice, your funds can pan out just fine.