Real estate investment trusts (REITs) have always been a popular choice for investors seeking income and diversification. As the Federal Reserve hints at an interest rate cut in September, the attractiveness of REITs is set to rise even further.

Among the various types of REITs, those focused on the burgeoning cannabis industry stand out as particularly compelling. With numerous states expected to vote on marijuana legalization this November, cannabis REITs are poised to benefit from dual catalysts: falling interest rates and expanding legalization.

Below, I steer you in the direction of the right REITs in the cannabis sector.

Cannabis REITs: Poised to Light Up

REITs are sensitive to interest rate changes. Lower interest rates generally reduce the cost of borrowing, which is beneficial for REITs because they often use leverage to finance their property acquisitions and development projects.

Lower rates tend to make the yields on REITs more attractive compared to other fixed-income investments such as bonds. As the Fed signals impending rate cuts, the investment landscape for REITs is becoming increasingly favorable.

The latest data reflect a sputtering economy, prompting Wall Street to bet on a larger rate cut at the September 17-18 Federal Open Market Committee (FOMC) meeting.

According to CME’s FedWatch tool, there is a greater likelihood of a 50 basis points (bps) reduction than an ordinary 25bps cut (see the following chart, updated as of August 8):

Source: CME Group

Cannabis REITs, which focus on properties leased to marijuana cultivators, processors, and retailers, are particularly appealing in the current environment. These REITs not only offer the traditional benefits of real estate investment but also provide exposure to the rapidly growing cannabis industry.

The cannabis industry is one of the fastest-growing sectors in the economy. As more states move toward legalization, the demand for cannabis-related real estate is expected to surge. Cannabis REITs are well-positioned to capitalize on this trend by acquiring and leasing out properties to cannabis operators.

Like other REITs, cannabis REITs are required to distribute at least 90% of their taxable income to shareholders as dividends. This makes them an excellent source of regular income, especially in a low interest rate environment.

The legalization of marijuana is a significant societal and economic trend. Investing in cannabis REITs offers a way to tap into this mega-trend, potentially reaping substantial rewards as the industry matures and expands.

The November 2024 elections are expected to be pivotal for the cannabis industry. Several states have initiatives on the ballot to legalize marijuana, and most of these measures are predicted to pass. This widespread legalization will likely lead to increased demand for cannabis-related real estate, providing a significant growth catalyst for cannabis REITs.

As new markets open up, cannabis companies will need more cultivation, processing, and retail spaces. Cannabis REITs that own and manage these types of properties will see increased demand, leading to higher occupancy rates and rental income.

The expansion of legal cannabis markets can also boost the valuations of properties leased to cannabis operators. As these markets mature and stabilize, the perceived risk associated with cannabis real estate diminishes, leading to potential appreciation in property values.

Hedging Against Market Downturns

One of the often-overlooked advantages of REITs is their ability to act as a hedge against market downturns.

REITs are known for providing consistent income through dividends. During market downturns, when capital appreciation may be limited, this steady income can provide a buffer against volatility. In recent days, the broader stock market has been a rollercoaster; REITs offer stability.

REITs invest in tangible, income-producing assets. Unlike some other investments, real estate tends to hold intrinsic value, offering a level of security during economic uncertainties.

Investing in REITs allows for diversification across different property types and geographic regions. This diversification can help mitigate risk and smooth out returns, especially during the sort of market turbulence we’re witnessing lately.

In addition, real estate has historically been a good hedge against inflation. As prices rise, so do property values and rental incomes, which can help protect investors’ purchasing power.

Cannabis REITs, in particular, offer a unique combination of growth potential and income stability. As the industry still goes through its early stages, there is substantial room for expansion. This growth is underpinned by a societal shift towards legalization and acceptance of cannabis, which is expected to continue for years to come.

Moreover, cannabis REITs often engage in long-term leases with their tenants, providing predictable and stable cash flows. These leases are typically triple net, meaning the tenant is responsible for most of the property expenses, which reduces the landlord’s risk and enhances income stability.

Investing in cannabis REITs allows investors to tap into the rapid growth of the cannabis industry while enjoying the benefits of real estate investment. With the dual catalysts of falling interest rates and expanding legalization, now is an opportune time to consider adding these unique REITs to your investment portfolio.

Choosing the Right REIT

But it begs the question: exactly which cannabis REITs should you pick? Marijuana investing can be highly profitable, but it also poses risks. Finding the right cannabis REITs takes due diligence.

The good news is, I’ve done the homework for you.

I’m the editorial director of Investing Daily. I’m also the chief investment strategist of our premium trading service Marijuana Profit Alert.

For Marijuana Profit Alert, I’ve put together a portfolio of the best-of-breed marijuana equities.

These holdings are poised to soar during this political season. If you’re fortunate enough to own these companies, you’ll reap a windfall. In my latest issue, I pinpoint a specific cannabis REIT that’s already exploding in price and has further to run.

Want to learn about my money-making marijuana trades? Click here.

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This article previously appeared on Investing Daily.