Hey, did you hear? Interest rates are going up.
You know what that means: We should sell our real estate investment trusts (REITs).
Well, that's what Wall Street would like you to believe during periods of rising interest rates.
After all, REITs borrow a lot of money, so their borrowing costs will go up and cash flows will shrink, and they might have to cut their dividends. Higher rates mean more competition from fixed-income investments. That urges investors to sell their REITs, then take that cash to go buy bonds, thus dragging REIT prices lower.
I mean, the U.S. Federal Reserve began raising rates in June 2004, going from 1.25% to 5.25% by summer 2006. That's a massive increase in just two years and had to have been horrible for REITs.
There's just one small problem with this thinking, though…
In fact, if you look at the most recent period of rising interest rates, REITs performed exceptionally well.
And it looks like we're entering yet another period of rising interest rates, in which we can outsmart Wall Street at its own game, collecting profits from undervalued REITs every step of the way…
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