Real estate investing for toe-dippers

People who buy their own homes are, in a way, real estate investors. So, of course, are those who buy part of a shopping center or office building through a limited partnership or a real estate investment trust.

Now, someone who doesn't have enough cash to make the down payment on a house or to buy into a limited partnership can use a mutual fund to invest in real estate. At least four mutual fund companies offer real estate investments, giving small investors access to a sometimes risky arena that has been largely controlled by syndicators and other specialists.

Not all of these companies are actually offering mutual funds of open-ended investment vehicles where investors can buy or sell shares whenever they like. But they all have fairly low minimum investment requirements and a diverse portfolio.

Of the four, only those offered by National Securities and Research Corporation in New York and Fidelity Investments in Boston fit the traditional definition of a mutual fund, where a portfolio manager buys or sells real estate investments to match sales and redemptions by investors.

As for the other two, Vanguard Group's Real Estate Fund I in Valley Forge, Pa., is a real estate investment trust (REIT) and the Baltimore-based T.Rowe Price Realty Income Fund III is a limited partnership.

``I can't emphasize enough the point that this is different from a typical fund,'' says Vanguard vice-president Brian Mattes. ``The main difference is that it's not liquid. Your money is tied up for the first two years at least. You should really expect to be tying up your money for a few years.''

Both Vanguard and the T.Rowe Price Realty Income Fund invest in commercial real estate directly.

``We buy office buildings, business parks, industrial buildings - this includes warehouses or distribution centers - or retail buildings,'' says Michael Daley, a spokesman for T.Rowe Price. ``We only buy on an all-cash basis, so we incur no debt.''

Vanguard's fund (800-522-5555) opened to investors last December and will close at the end of June, Mr. Mattes says. As of mid-May, it had collected some $50 million in subscriptions. The investment adviser, Aldrich, Eastman & Waltch in Boston will begin purchasing commercial properties after the fund closes.

Investors who want to join Vanguard's real estate game after that will have to wait - perhaps a year - until a new fund is introduced for another limited run.

Then again, they may not have to wait that long, if the experience of T.Rowe Price (800-638-5660) is any guide. The company is now offering its third real estate limited partnership. The first, Realty Income Fund I, was opened in December 1984 and closed the following May. The second opened in March 1986 and closed in July. Fund III was offered this January and will close at the end of June. More are likely.

In the tradition of their regular mutual funds, both the Vanguard and T.Rowe Price real estate funds are sold on a no-load basis, that is, without a sales commission. They both have $5,000 minimums, $2,000 for individual retirement accounts. But unlike the companies' mutual funds, the real estate funds have other front-end charges.

Buying real estate, as any homeowner knows, is a complicated procedure that includes attorneys, appraisers, and inspectors. In the case of commercial real estate, it also includes specialists who find and evaluate property. The fees for these people and other ``acquisition costs'' run from 7 to 9 percent at Vanguard and about 10 percent at T.Rowe Price. But that's still less than the 18 to 20 percent many syndicators charge for getting into a limited partnership.

At the Fidelity Real Estate Fund (800-544-7777), which started last November, there are no acquisition costs because the fund does not acquire any property, says product manager Karen Swanson. Most of the money is in REITs or securities of real estate development companies, lumber companies, entertainment companies with large land holdings, shopping centers, and transportation companies like railroads, which also own a lot of land. Like most of Fidelity's stock funds today, this one is sold with a ``low load'' of 2 percent. The minimum investment is $2,500.

A higher load, but a similar investment strategy is practiced at the National Real Estate Fund (800-237-1718). Here, there's a sales commission of 7 percent, says fund manager Marty Cohen.

``We buy securities of companies that invest in or develop real estate,'' Mr. Cohen says. The fund has been in business 2 years, he says, making it the only one with any kind of measurable track record. Since it started, the fund has had a 50 percent gain, counting a higher share price and dividends.

While these funds have attracted the interest of financial planners, others feel they can do better. ``If I'm going to put someone in real estate, I can usually go out and negotiate a better deal for clients,'' says Michael Leonetti, a fee-only planner in Arlington Heights, Ill. ``Most of these funds will not generate the cash flow of a really good deal.''

Still, all four of these companies claim they are a good way for investors to get a somewhat painless introduction to real estate, and a way for more more active real estate investors to diversify their risk through a mutual fund.

But with many of tax reform's effects on real estate still uncertain and with gluts continuing in some parts of the country, there are plenty of reasons for an investor to keep these funds a fairly small part of their overall portfolio.

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