2 Major Ways Higher Interest Rates Affect REITs

2 Major Ways Higher Interest Rates Affect REITs

Historically, REITs tend to hold up well during inflationary periods.

In this video clip from “Ask Us Anything” on Motley Fool Live , recorded on Feb. 28 , Fool.com contributors Matt Frankel, Dan Caplinger, and Nicholas Rossolillo answer a member’s question about whether now is a bad time to add REITs to a portfolio with interest rates rising or would it be better to wait until the current volatility subsides. Video Player is loading. Play Video

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FullscreenThis is a modal window.Beginning of dialog window. Escape will cancel and close the window.TextColorWhiteBlackRedGreenBlueYellowMagentaCyanTransparencyOpaqueSemi-TransparentBackgroundColorBlackWhiteRedGreenBlueYellowMagentaCyanTransparencyOpaqueSemi-TransparentTransparentWindowColorBlackWhiteRedGreenBlueYellowMagentaCyanTransparencyTransparentSemi-TransparentOpaqueFont Size50%75%100%125%150%175%200%300%400%Text Edge StyleNoneRaisedDepressedUniformDropshadowFont FamilyProportional Sans-SerifMonospace Sans-SerifProportional SerifMonospace SerifCasualScriptSmall CapsReset restore all settings to the default valuesDoneClose Modal DialogEnd of dialog window.Close Modal DialogThis is a modal window. This modal can be closed by pressing the Escape key or activating the close button. Where to invest $1,000 right now Before you consider making any real estate investment, you’ll want to hear this.Our team of real estate experts and analysts at The Motley Fool just revealed what they believe are the top 5 best REITS under $49 for individual investors right now… and they’re giving the report away for free.Over the last 20 or so years, REITs have consistently outperformed the regular stock market. And with the recent release of our top 5 favorite REIT investments right now, we believe it’s an ideal time to get invested. Matt Frankel: Higher interest rates can affect REITs in two main ways. One is a secondary way, it makes their funding tougher or more expensive. Most REITs require or depend at least on some borrowed money to finance their growth strategy, like how real estate investors take out mortgages to buy properties, same idea with REITs. As interest rates rise, those get more expensive it adds to their cost of capital.No. 2 and more significantly, income stocks like REITs their yields generally move in tandem with risk-free rates. Specifically, the 10-year treasury is a really good benchmark. As treasury yields rise, investors expect that risk premium meaning the difference between what they can get on a risk-free investment, and a so-called risky investment, like a REIT to roughly stay the same.As REIT yields get pushed higher by rising rates, yields and share prices have an inverse relationship, so it puts pressure on their stock prices. All that said, as I said at the top of the show, it’s all about expectations. Right now the expectation is that the federal funds rate is going to rise to roughly two percent by next year.If that holds true, it wouldn’t really have that much of a detrimental effect on REITs because that’s what the market’s expecting at this point. Keep an eye on that, it’s never really a bad time to buy REITs because as Dan mentioned, they’re not just income stocks, there’s that growth element as well, they’re meant as total return investments.Historically, they tend to hold up really well during inflationary periods. They don’t necessarily tend to beat the market like they do during low inflation and low-interest rate times, but they tend to hold up quite well during inflationary environments, and a lot of that is because their property values keep up with inflation. Rent keeps up with inflation, things like that.So it’s not just a question of what it does to their income, there are also pretty inflation-protected growth investments in that way. It’s not a bad time to buy REITs. You could definitely see them come under some volatility, especially if interest rates don’t perform as expected, but they’re still the biggest component of my portfolio, and I don’t plan on changing that. Dan Caplinger: Nick, I know that you’ve got some experience in the real estate area as well. What thoughts do you have on that REIT question from Fig? Nicholas Rossolillo: Actually, the only thing I would add is just what Matt said, the very last sentence Matt just said, I don’t plan on changing anything right now. There’s been a lot of questions in the last few weeks for good reason about not just REITs, adding to REITs right now, but dividend stocks in general.I would just say this to investors, a lot of investors had a bad 2021 they were heavily invested in these growth stocks that are getting beat up, the last two months have been […]

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