REITs are a type of stock made up of portfolios of commercial properties. These properties generate income from rent and capital appreciation in the form of rising property values. REITs typically invest in office buildings, shopping centers, hotels, and other properties. Some focus on specific types of real estate, such as health-care REITs that own hospitals, skilled-nursing facilities, and so forth. There also are mutual funds and exchange-traded funds made up of REITs as well as those that track REIT indexes.
REITs' main purpose is to generate revenue from leases. And because they are required to pay nearly all of that revenue to shareholders, they can offer high yields, making them good choices for investors looking for a steady source of income, though they are far more effective in tax-advantaged accounts such as IRAs or 401(k)s where their nonqualified dividends are shielded from Uncle Sam. Historically, REITs have provided a hedge against inflation, which tends to increase real estate prices and rents.
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