Why Investors Should Load Up on REITs Before the Fed Lowers Rates

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Interest rates have been elevated since the start of the year, and many consumers are unhappy about that. Although higher interest rates can mean better returns in savings accounts and CDs, they can also make borrowing very expensive.

The good news for consumers hoping for rate cuts is that there’s growing talk of the Fed lowering its benchmark interest rate when it meets in September. Not only could lower interest rates make it cheaper to sign loans, but they could also have an impact on certain investments.

One example is real estate investment trusts, or REITs. In fact, you may want to load up on REITs in your portfolio now, before interest rates start to fall.

How interest rates impact stocks

Interest rates can clearly impact consumers by making borrowing more or less expensive. But some stocks are notably sensitive to interest rate fluctuations. Usually, this is the case when a company has a large debt load.

When you, as a consumer, want to borrow a lot of money, higher interest rates can add to your costs. The same applies to companies that have heavy debt loads. And REITs tend to fall into that category.

So why is now a good time to load up on REITs? It’s simple. If interest rates start to fall, REITs may find themselves with lower debt costs. That could drive REIT prices upward. And it’s better to buy REITs while prices are lower than when they’re higher.

Are REITs right for you?

If you’re interested in investing in REITs, now’s a good time to add some to your portfolio. But are they a suitable investment for you?

One benefit of REITs is that they’re required to pay at least 90% of their taxable income as dividends to investors each year. For this reason, you may see higher dividends out of REITs than other dividend-paying stocks or ETFs.

REITs also, by nature, are a great diversification tool. They allow you to invest in real estate without owning physical real estate, thereby reducing the risk and headline.

On the other hand, REITs, like all stocks, are subject to market fluctuations. And within the REIT umbrella, specific segments face their share of challenges.

Take retail REITs, for example, which commonly operate portfolios that include indoor and outdoor shopping malls. Many retailers have been struggling in the years following the pandemic, and store closures have been rampant, leading to vacancies. Those are bad for the companies that rely on rental income.

This isn’t to say that retail REITs are a poor choice. The point, rather, is to highlight the fact that not only can REITs as a whole carry risk, but certain sectors can potentially carry added risk.

All told, though, REITs could be a great addition to your portfolio, especially if you’re drawn to income-producing assets and don’t already have your hand in the real estate sector. If the Fed lowers rates, it could drive REIT prices up, so you may want to add REITs to your portfolio while prices are a bit lower.

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