REIT and Inflation: Are REITs a Good Inflation Hedge?

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I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

Real estate investment trusts (REITs) have become a popular investment, as real estate prices have soared since the pandemic.

But many investors see record-high inflation metrics and wonder whether their investments are safe.

In short, REITs and inflation tend to be proportionately linked.

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REITs and Inflation

During high inflationary periods, REITs have performed better than the S&P 500 (standard stock market investments) in income and price returns.

This success is because, as real estate companies, REITs make most of their profit from rents and, in some cases, other commodities (such as self-storage or forest REITs).

Inflation acts as a rent escalator—the net lease rates tend to rise when inflation is high. Additionally, other REIT-related income streams also go up with inflation, such as property values and other essential commodities.

Historical REIT Returns

Historical data and REIT index information are easy to access for REITs as a result of work undertaken by the National Association of Real Estate Investment Trusts (NAREIT).

The organization has tracked and collected data on the historical performance of REITs during different economic periods, which makes it easier for experts to estimate how REITs will perform in the future.

Based on data provided by NAREIT, the Federal Reserve and historical data on the Consumer Price Index (CPI), we can predict how REITs are likely to perform if inflation continues to rise.

In general, during various inflationary periods, this is how REITs have performed:

REIT returns versus inflation

Low inflation: REITs have historically had similar total returns to the S&P 500 during low inflationary periods; however, most of the profits come from income returns rather than from price returns.

Moderate inflation: REITs have historically outperformed the S&P 500 during periods of moderate inflation. REITs have had lower price returns, but they have made up for it in income returns.

High inflation: During high inflationary periods, REITs have outperformed the S&P 500 in price returns, income returns and total returns.

Do REITs Protect Against Inflation?

REITs also protect investors because they pay dividends. Dividends can provide investors with cash flow during periods when they may not want to sell stocks.

What Happens to REITs When Inflation Rises?

When inflation rises, REITs tend to outperform other types of investments (including stocks, dividends and bonds).

During times of inflation, many investors turn to low-volatility options, such as 10-year treasury bonds or CDs. But overall, REITs have higher dividend yields than these other investments.

U.S. Treasury Bond yields have been about 3.76% for most investors over the last 10 years, even as inflation has risen. Comparatively, REIT returns have been as high as 11%.

REITs have also seen higher dividend growth during inflationary periods, increasing cash flow for investors.

REITs and Interest Rates

Another aspect that you should consider when looking at the success of REITs during inflationary periods is interest rates.

During times of high inflation, the Fed tends to increase interest rates to slow inflation and protect the economy. Just as inflation affects REITs, interest rates have an impact on REIT success as well.

When interest rates rise, REITs have generally outperformed other stocks and investment options.

REITs outperform other investments because REITs can charge more for rent while remaining competitive when interest rates are high.

Additionally, the value of the REIT’s properties will rise as interest rates and inflation go up.

Benefits of REIT Investment During Inflation

While REITs have outperformed most other investment types during times of high inflation, they also have some other unique benefits.

  • Dividends: REITs must pay dividends to their investors. These dividends will provide investors with cash flow in times of uncertain economic periods. This is good for investors because they will have income streams, which help keep stock prices up, as investors are less likely to pull out.
  • Dividend growth: U.S. REIT dividend growth has surpassed the rates of other dividend stocks over the last 10 years.
  • Asset class benefits: The current investment market is struggling with many uncertainties, including supply chain issues, inflation and increasing interest rates. Real estate assets are tangible and less likely to experience volatility than other types of investments.
  • Portfolio diversifier: During times of uncertainty and potential financial crisis, diversification becomes more important than ever. Because REITs own multiple income-producing properties, they have inherent diversification, which protects investors.

How to Invest in REITs During Inflation

There are two primary types of REITs that you can invest in: public and private. These two types of REITs are very different, so the process of investing in each is also different.

Investing in a Publicly Traded REIT

Investing in a publicly traded REIT is like investing in any other kind of stock market investment. To invest, you can follow these steps:

  1. Choose a brokerage: Many different financial institutions offer investment accounts. Each kind has different pros and cons and will work better for different types of investors. Before making a final choice, research carefully to ensure you choose the right brokerage account.
  2. Open an account: To open an account, you will need your financial information, full name, Social Security number, and ID. It is easier to open an account if you have all of the information gathered before you begin.
  3. Set a budget: It is best to know how much you want to invest before putting money into your account. Establishing a budget will prevent you from investing more than you can afford to lose.
  4. Choose an investment: Look for commodity-based essential investments during high inflationary periods, as they are more likely to rise with inflation. Residential REITs meet both of these criteria.
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Investing in a Private REIT

You will need to hire a broker to invest in a non-publicly traded REIT. In many cases, you may also need to be an accredited investor.

To become an accredited investor, you must make more than $200,000 per year if filing alone, $300,000 per year if filing jointly, or you must have a net worth above $1 million.

The Securities and Exchange Commission regulates accreditation status in the U.S.

Hiring a broker is often a complicated process. You should talk to several brokers before choosing the right one for you.

Additionally, you should always check a broker’s qualifications through FINRA before you hire them.

Considerations Before You Invest

REITs are some of the safest investments available, especially during high inflationary periods, but it’s essential to consider the following before you commit:

  • Assurance of returns: Aside from insured savings accounts and bonds, there are no investments that have a guarantee of future results. Never invest more than you can afford to lose, and always maintain a diversified portfolio.
  • Illiquidity: REITs are not short-term investments. In many cases, it is impossible to get your investment back before the term of your agreement.

Are REITs a Good Hedge Against Inflation?

They have historically outperformed other types of investments, and, as commodity-based companies, they tend to increase with inflation.

As inflation and interest rates continue to rise, now is the ideal time to invest in REITs. Getting in early will ensure that you make the most of your investment.

Fundrise

Welcome to the future of real estate investing. For a limited time, invest and get $10 in shares*. It only takes a few minutes to get started.

We earn a commission when you open up a free account and deposit funds.

I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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