Relationship Between REITs and Rising Interest Rates

reits and rising interest rates

In today’s rising interest rate environment, many real estate investors are wondering what the relationship is between REITs and rising interest rates.

Here are three factors to consider.

Asset Quality of the REIT

Experienced real estate investors understand that not all real estate assets are created equal.  That’s why a time-tested truism is that real estate is all about location, location, location.

But in a hot market with real estate prices rapidly rising year after year, it’s easy to forget about quality and focus solely on quantity.  Sometimes traditional real estate companies do this all too often.

As interest rates continue to rise, REIT managers may have a hard time refinancing if they made the mistake of buying a low-quality asset at too high of a price.

Property Loan Refinancing Timelines

Loans on commercial investment real estate and larger multi-family property are usually made for only a few years at a time.  That’s because lenders know that volatility in the real estate market can appear at any time.

Another reason for short-term real estate loans is that lenders what to ensure that the asset is being maintained and that the real estate property management is top notch.

It’s important for both residential and commercial REIT investors to understand when each individual loan becomes due and what the prospects are for refinancing.

Real Estate Assets of the REIT

Investors concerned about REITS and rising interest rates should also investigate the quality of each individual asset that the REIT owns.  This will help to identify potential problems when the time comes to refinance.

Some items to research include:

  • Uniqueness of property
  • Competitive environment
  • Occupancy and tenant types
  • Asset class – retail, office, industrial, multi-family residential
  • Economic drivers of the market area

REITs and Rising Interest Rate – The Crowdfunding Alternative

Investors who are worried about specific REITs and rising interest rates often find that crowdfunding can be a good alternative to buying a publicly-held REIT.

That’s because crowdfunding organizations such as RealtyMogul and Fundrise raise capital for one specific asset purchase at a time.  This makes it much easier for the individual real estate investors to determine whether the real estate investment makes sense for their portfolio.