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When inflation is on the rise, the best REIT stocks can be an appealing place to invest thanks to their high yields, but rising interest rates can also be a detriment to returns.
“Rising interest rates can adversely affect many REITs due to the increased costs of purchasing and maintaining properties as well as the possibility of decreasing property values,” Laginess says. “The Federal Reserve has drastically increased interest rates over the past two years which has negatively affected many properties due to the cost of borrowing.”
If you’re trying to diversify your portfolio, Edward Fernandez, president and CEO of 1031 Crowdfunding, a real estate investing platform, warns that publicly traded REIT stocks may not fit that bill.
“A (publicly) traded REIT belongs more in your equity portion of your allocation and is not investing in true real estate,” he says. “REIT stocks are subject to the volatility of the equity market because the value of that stock is not directly tied to its real estate; it’s tied to the company that owns the real estate and its performance.”
Correlation, or the degree in which two assets move in tandem, is measured on a scale of -1 to 1 where 1 indicates perfect correlation. From January 2011 to December 31, 2022, REITs had a 0.73% correlation with the S&P 500. By comparison, commodities had a 0.42% correlation to the S&P 500 over the same time period.
If you want to diversify with REIT stocks, Fernandez says to look to non-traded REITs. These can usually be purchased through a financial advisor.
Non-traded REITs can be riskier than their publicly-traded counterparts, however, with lower liquidity and transparency plus higher up-front fees – usually 9% to 10%.
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This article was originally published by a www.kiplinger.com . Read the Original article here. .