Become a Lazy Landlord – with REITs

Rich people come in many different flavors. Any established wealthy person knows that it is much easier and more profitable to have their money working for them, than to depend on using their own time and labor to work for money. That’s why we call our dollar bills employees here at MMM. But beyond this common agreement, the rich people diverge on the best way to dispatch their employees.

Some, like Warren Buffett, buy businesses – also known as buying stocks. If you buy good businesses when their stocks are on sale, you see a steady stream of dividend income and the stock price appreciates due to growth and profits in the companies.

Others, like a number of smiling bald men with grey beards I know in my own neighborhood, insist that owning rental real estate is the only way to become rich, and generate a nice cashflow during retirement.

I do a little bit of each myself, although to a much smaller degree than my Bearded Mustachian neighbors, since I have only a limited need for riches – enough to fund the MMM family’s excellent lifestyle, provide for plenty of future safety margin and allow random generosity a few times a year. Beyond that, the money would just be wasted on me since I’m not into powerboats, McMansions, or diamond rings.

So I’ve got this one rental house right now. The rent it brings in, after subtracting property taxes and other expenses, add up to 5.5% of the appraised value of the house. The rent goes up with inflation each year, and the value of the property also keeps up with inflation – or since there is a mild housing recovery going on in my area, it could be considered to slightly outpace inflation for a while until prices plateau out again. In other words, it is perhaps delivering a 6% return after inflation. And due to the major tax advantages of rental property ownership, the net income is closer to holding a stock that pays a dividend of 7% after inflation. Not a superb performance, since I actually have to do some work to manage the place, but due to our low living expenses, and the fact that there is no mortgage on either this rental or my main house, this house already more than funds the entire MMM family lifestyle. So all my other stock holdings, 401k accounts, and part-time income, and eventual social security payments in the distant future, are just gravy.

But as I’ve been landlording away all these years, occasionally having rather annoying experiences with tenants, I’ve been hearing and reading about REITs. Real Estate Investment Trusts. There are many advanced readers here who have been investing in and benefiting from these things for years, but there also many others who have never even heard the acronym before. So here’s a quick  summary before I present a few recent findings about REITs that make me feel like a fool for living off my rental house instead of letting someone else do the work.

REITs are a special category of company, only made available in the US in 1960. The key detail is that the company must invest most of its money in real estate to produce income, and it must distribute at least 90% of its income back to its shareholders.

So let’s learn more by zooming in on one of these funds as an example, which I heard about through a friend. It’s called Senior Housing Properties Trust – with ticker symbol SNH. According to the google finance link I just provided, SNH owns “320 properties located in 36 states and Washington, D.C. Its portfolio includes 226 senior living properties with 26,380 living units / beds and two rehabilitation hospitals with 364 licensed beds; 82 medical office, clinic and biotech laboratory buildings (MOBs) with 5.2 million square feet of space, and 10 wellness centers with approximately 812,000 square feet of interior space plus outdoor developed facilities. “

Holy Shit! That sounds WAY more advanced than my rental house. As insurance for a continued string of good renters, all I’ve got is the fact that I have a very nice luxury house with low maintenance in a high-end neighborhood. Better than owning a slum unit, but look at SNH – if I buy that, I am diversified across 36 states, in a market that is very large, wealthy, and stable – SENIOR CITIZENS.

Even better is the dividend rate – 6.86%*. In other words, his fund pays just as well as my rental house, but I don’t have to do any work. Even though the tax treatment of the REIT dividends (which get treated as regular income if I read correctly) is not quite as good as rental house income, it’s still a tradeoff I would gladly make.  Plus, you can buy any amount that you want – $1000 gets you $68.60 per year, $10 grand gives you $686, and throwing in 350 thousand gives you about $24,000 per year, which will theoretically automatically adjust for you with inflation – plenty to live on!

Other REITs own things like apartment buildings, office buildings, commercial or industrial developments – anything where they can get a good stable rent. Usually things that you as an individual investor would have a hard time lining up to buy all by yourself.

There are two components to any stock investment – the actual share price ($21.57 for SNH at the time of writing), and the dividend yield. Most stocks in the S&P500 index pay much lower dividends, because their companies retain their earnings in hopes of investing in more growth. With these stocks, you depend mostly on share price appreciation to grow your wealth – i.e., eventually selling them off in small chunks for more than you bought them. With REITs, you don’t care so much about the stock price, other than buying it low since that gets you a higher dividend yield (dividends stay the same regardless of share price, so if you can buy the shares cheaper, you are getting a higher percentage). For the record, the actual SNH share price has still outperformed the S&P index over the past 5 and 10 years, but underperformed during the last year.

When you look at the google finance link above, you’ll also see a bunch of “related companies”. These are other REITs, also with high dividends. To save you a few clicks, I have sorted them by highest dividend yield and pasted the list in here. The column on the far right is the annual dividend yield for each:

OHI Omega Healthcare Inves… 17.10 -0.05 -0.29% 1.75B 9.80
MPW Medical Properties Tru… 9.98 +0.08 0.81% 1.11B 8.19
HR Healthcare Realty Trus… 16.10 +0.27 1.71% 1.25B 7.62
LTC LTC Properties, Inc. 23.70 +0.70 3.04% 719.07M 7.40
SNH Senior Housing Propert… 21.57 -0.03 -0.14% 3.31B 7.00
UHT Universal Health Realt… 34.98 +0.07 0.20% 441.93M 6.60
HCN Health Care REIT, Inc. 45.88 +0.71 1.57% 8.12B 6.37
HCP HCP, Inc. 33.16 +0.62 1.91% 13.50B 5.93
NHI National Health Invest… 41.90 -0.24 -0.57% 1.16B 5.86
VTR Ventas, Inc. 47.50 +0.31 0.66% 13.68B 4.84


REITs like these are quite an amazing find if, like me just last year, you didn’t realize such high dividends were available at the click of a mouse. A source of easy income in exchange for moderate risk – a risk I will gladly take myself for some of my continued retirement income as the portfolio evolves.

*  update – make that 8.78% as of 2016, because the share price has fallen even as earnings are higher. So now $350k of this stock brings in $30,730 of income. But on paper the stock has “lost” money because its purchase price is lower in 2016 than in 2011 when I first wrote this. Also, I actually own some SNH shares now.

  • Fu Manchu August 15, 2011, 7:17 am

    That’s great stuff, been interested in these for a while. What are your thoughts on REIT Index funds? Seems like any index fund…less risk, less reward (just looking, the dividends being payed are in the .69% – 1% as opposed to the SNH 1-2%).


    Probably a year off until I dip my toes, still have to flesh out the bulk of my portfolio with S&P, Total Stock Market & Target Retirement funds (all low expense via Vanguard). But yet another fun thing to geek out over / track and analyze!

    • SS November 14, 2015, 2:36 pm

      Ouch. REITs are getting slammed this year and (SNH) Senior Housing Properties Trust is down -40% since this post 4yrs ago.


      Obviously, the individual property would have fared much better over the same time period.

      • Mr. Money Mustache November 15, 2015, 4:28 pm

        True, but you would have collected 28% dividends and SNH is an even better deal now than it was at the time!

        I actually ended up buying some REIT shares (including SNH) after selling my rental house earlier this year. Still pleased with the purchase since I am holding for long term income rather than short term speculation.

        • SS December 19, 2015, 11:13 am

          Even with the dividends you’d be in the red.

          That $350k invested when this article was written in Aug, 2011, would now be worth only $309,666. That equates to an Annualized Return of -2.77%

          Yes, they are still paying a dividend and it has increased (for now).

          But well run, sound companies share prices don’t just fall 50% for no reason. This is a very high risk investment.

          If you want a solid REIT investment that has proven itself and is well diversified, look at Realty Income (O)

          That same $350k would now be worth $681,479 with an Annualized Return of +16.55%

          And they pay MONTHLY.


          • CP March 17, 2017, 2:22 am

            Excuse me Mustache and peers,

            My partner and I own one rental property outright which generates income for us (we live abroad, work for the government). We’re planning on purchasing a second rental property next year which together will provide sufficient passive income to cover our living expenses. We’re of course simultaneously investing into our employer-provided retirement accounts and what I can’t seem to find information on is whether we would be overexposed to real estate if we invested in any REITs. Any insight to provide here?


  • Dwight August 15, 2011, 7:44 am

    Vanguard has an REIT. They list the risk/reward as “4” on a scale of 1 to 5. So- I wouldn’t want REITs (or anything else) to be my only income.

    REITs could be a way of diversifying if you put a portion of your money there while still keeping a good amount in stocks. There are times when REITs do well and stocks are down. The reverse is also true. That’s why we diversify.

    REIs also make sense for people who don’t own a home, but still want a portion of their money invested in real estate.

    • Wiiksi Wallu August 17, 2011, 1:46 pm

      Although REITs might be considered risky investments for a retiree, the risk is hardly higher than that of owning rental property. REITs move together with the whole real estate market, for good or bad, while there are countless numbers of things that can happen to your own property.

      Prices could go lower (or higher!) in some local neighborhoods, regardless of the overall market, bad tenants could leave a big mess behind, or some expensive equipment could break — three months in a row. Lady Fortuna might turn against you for a few months.

      So remember to strive for good enough risk/reward ratio when working on the real estate part of your total portfolio. The great thing about REITS – also mentioned in the article – is that they can be bought in just the right sized chunks. They do have their place in the total asset allocation and as long as the portfolio is not too heavily oriented on real estate investments (one’s home might also need to be taken into account), one should be fine (in the long term).

      With REITs there is no simple way to positively affect the overall performance whereas with rental property you can really make a difference, like MMM has done by renovating, selecting the right tenants, etc. Some might want to rent out apartments simply because they like to deal with people, i.e they see it as an enjoyable, social activity. YMMV.

  • Dan August 15, 2011, 7:34 pm

    Re: “Even though the tax treatment of the REIT dividends (which get treated as regular income if I read correctly) is not quite as good as rental house income, it’s still a tradeoff I would gladly make.”…

    In the long run they’re both treated identically for taxes. Net income from a REIT is taxed as ordinary income, same as net income (after depreciation, if any) from rental property. For the first several years of rental property ownership, though, you could to subtract from your income the depreciation on your original cost of the house. Once your house is fully depreciated, these will have the same tax incidence to you.

    And you’ll have to pay ordinary income taxes on the value of the house that was previously depreciated away, too (unless you move into it and live there for two years prior to selling). So really, owning a house versus a REIT have essentially identical tax treatments to you.

    • MMM August 15, 2011, 9:47 pm

      Good explanation of the tax laws, Dan,

      But most landlords find the deferral to be very valuable. You own the rental house and do heavy depreciation while you are still an office worker raking in a huge salary, so you are dropped into a lower tax bracket. Then, you retire and live off of the rent from the house – and you STILL have never paid taxes on that depreciation benefit. If you keep it until you die, you never pay the taxes (your estate does, but you don’t care about that). OR if you sell while still alive, which I certainly plan to do, at least you do it in a year with little other income, so much of it is sheltered in the lowest tax bracket with the wonderful Standard Deduction, etc.

      • Danny July 16, 2016, 6:33 am

        Any depreciation on your house would’ve subject to recapture & therefore taxed at ordinary rates when disposed. While the initial deferral is valuable, this can really eat into your gains.

        Moving into your house does not shield you from recapture. This concept applies to just about all property subject to depreciation, including home office depreciation.

        • myFIinthesky December 17, 2016, 11:18 am

          You could do a 1031 exchange and avoid capital gains by rolling the sales proceeds into another real estate investment. You could also keep the real estate until you die (maybe after performing several 1031 exchanges along the way), and give your kids a stepped up basis in the property. You could avoid ever paying taxes on all those unrealized capital gains and the unrecaptured depreciation. Your kids could then perform the depreciation all over again.

          Now you’re not just deferring the taxes, but avoiding them altogether.

    • Eric August 21, 2011, 9:43 pm

      Owning RE properties vs owning shares of REITS

      What about using leverage and the equity build-up of a smaller house to buy a bigger (house) property.

      How does investing in REITS allow the small investor to buy that same property without having to buy the exact amount of shares that it’s worth knowing he doesn’t have the money for it?

    • Flow focused October 30, 2017, 7:07 pm

      Dan, Not sure if you are still around. Are you a CPA in the US? I’m 99% sure net income from a rental property is taxed at a capital gains rate of 15%, not earned income rate. Maybe REIT dividends are also taxed at that save 15% rate? I have never claimed any REIT gains so I would not know the tax rate of them.

      • Austin July 2, 2018, 11:41 am

        Net rental income is taxed as ordinary income and NOT at capital gain rates. Rental income is not subject to self-employment tax however (such as flipping houses) so that is a plus. Capital gain rates would apply if you held the house for over a year and then sold.

        REIT ordinary dividends are taxed at ordinary income rates and qualified dividends are taxed at lower capital gains rates. I am a CPA in the US, specializing in real estate.

  • Rich Schmidt August 21, 2011, 11:44 pm

    Hmm…. I wonder which gets me further ahead: investing $20,000 as the down payment on a house that I’ll rent out for 30 years or investing $20,000 in a REIT for 30 years?

    I really don’t have the chops to run the numbers quickly… but my gut tells me I’d rather own the rental property. The renters pay the mortgage (and then some), and once the mortgage is paid off, the income/return jumps.

    Just thinking out loud. We’ve gone the rental route and don’t have anything invested in REITs (that I know of).

    • Tommy J August 22, 2014, 4:10 pm

      We are with you Rich…there is the very-longterm benefit once it is paid off, but perhaps the simplest way to “crunch the numbers” would be a quick glance at your rental income to mortgage plus taxes ratio. I think there is a place for REITs in any portfolio, but % of your portfolio is going to be different if you are owning and renting in San Francisco vs Sacramento (example being that I can get my mortgage back in rent in SF vs eating some $ each month on rentals in Sacrament0…if I had them of course)

  • Blaine August 22, 2011, 2:19 pm

    Some things to consider:

    1) Look at dividend history. How long have they paid dividends? Do they show a culture for maintaining a share-holder friendly dividend policy? Or are they over-leveraged and cut dividends at the first sign of a recession? Are dividends consistent and increasing every year?

    2) How much debt does the company take on?

    3) What kind of dividend GROWTH are we talking about here?

    4) Interest Rate Risk: With highly leveraged REITS like NLY, they only pay out such a high yield due to their high debt at low rates. When rates rise, they’ll likely have to cut dividends.

    There are lots of great REITs out there, and to throw another one onto your list I’d mention O. I recently opened a small position in O and probably will hold it for a long time, buying more on dips. No debt, paid dividends for decades without cutting, conservative growth (both good and bad, only 3% dividend growth annually on average), pays monthly, raise dividend every quarter. The monthly is nice because re-investing dividends lets me buy more often during this choppy market. In the last dip you could get O for 6%, currently its back around 5.5% yield.

  • Ademac August 22, 2011, 5:18 pm

    Before you get carried away on investing in REIT a word of warning.

    When the GFC hit and everyone panicked and tried to withdraw their money from the REIT here in Australia, they froze all redemptions and dividend payments for about two years.

    It caught a lot of people out who were relying on that money to pay for their retirements.

    So in the end “Caveat Emptor”

    • Matrix June 23, 2012, 9:05 am

      What you said sounds like private REIT to me. Public REIT doesn’t suffer this problem. Public REIT won’t froze dividend unless the major tenant stopped paying rent.

  • Dan August 22, 2011, 5:44 pm

    You should be careful investing in REITs, as many of the top performers in terms of dividends supplement their rental income by investing in mortgages. These REITS are also known as mREITS, and benefit enormously from the current environment of low interest rates, as they are basically performing the classing banking function of borrowing money at low interest rates and lending it at high interest rates. Expect to see divided cuts in many REITs when interest rates rise.

  • Fu Manchu August 22, 2011, 6:48 pm

    @Blaine, Ademac and Dan – all good words of wisdom..thanks for sharing. Pushes me toward the Vanguard REIT Index VGSIX for less risk.

    Blaine, with more conservative 3% dividends from O, why not just go for VGSIX? Unless I’m not reading it correctly, looks like it has about the same dividend rate (quarterly dividends that add up to 3%) but you would get arguably the most diversity possible. That said, the fact that O pays monthly dividends is pretty sweet for exactly your reasoning – a type of dollar cost averaging (cheap shares in choppy markets).

    Take with a grain of salt because I am learning this stuff as I go.

    • MMM August 22, 2011, 8:08 pm

      True, true – I definitely trust Vanguard funds to be more safe and conservative than individual REIT funds.

      Just to point out a couple of details about SNH in particular – I was pleased that it does have a history of increasing dividends since it was listed in October 1999. And they continued right through the 2008 property crash with no interruptions. Also, the price of the shares themselves are remarkably stable – outperforming the overall S&P index over most periods, and not really getting destroyed much more than the general stock market during the property crash. Also, as far as I can tell, SNH is not an mREIT, just a plain old property owner. Their leverage rate seems to be only 20% as well (i.e., their debt is only about 20% of the appraised value of all properties together).

      • Jacob October 2, 2014, 12:02 pm

        3 years later, are you still holding SNH? Have you moved to a more promising REIT? I’ve been looking at their news and ticker lately and don’t see how this has been outperforming the market?

        • Mr. Money Mustache October 3, 2014, 6:35 pm

          They’ve been paying dividends the whole time – just like a good rental house. If you’re just looking at the ticker price, you might be missing the point of REITs. But yeah, with perfect hindsight it would have been great to sell all real estate and load up on normal index funds when this article was written. I’ll let you know the next ideal move in another 3 years ;-)

          • Alex April 12, 2018, 6:46 am


            • Mr. Money Mustache April 13, 2018, 3:26 pm

              Thanks for the reminder Alex! The SNH shares have delivered roughly another 8% per year since then, and meanwhile the S&P500 has done about 10% per year including dividends (per the IndexView tool described elsewhere on this blog). So, stocks win again.

    • Blaine August 22, 2011, 8:58 pm

      Hi! Sorry I focus on Dividend *growth*. This means the yield is important, but more important is how that dividend is A) Sustainable and B) grows over time. AKA how to buy FUTURE high-income streams at a discount today.

      So with O you’ve got a 5.5% – 6% yield on today’s market, and your dividend payout GROWS every single year at 3-5%.

      Compare that to MCD for example, a classic “dividend growth rockstar”, who is growing dividends at about 15% per year since the late 1970s. With MCD, your 2.5% initial yield-on-cost if you bought today will be paying you double, or 5% yield-on-cost, in about 5 years (if they grow as they have in the past, which might be not possible). In 10 years it will have doubled again, for 10% yield-on-cost. Investors who wait 20 years get their original investment back every two years (because your’e not getting around a 50% yield-on-original-cost). I cherry picked this example for obvious reasons, but the point is the same – namely, you can’t ignore the *growth* of the dividend.

      Because O is only growing at a modest 3-5%, you’d expect your income from O to double every 18 years or so. So if you invest $10k in O now, you’re looking at about $550/year in income at today’s 5.5% yield (last week you could have snagged O for a healthy 6% yield). In 18 years you’d have grown to $1,100/year in income. [0]

      I hope this makes sense. Take care! -Blaine

      Also I’m a bit disappointed in the comment system here. I did put in my email address to be polite, but the comment system associated my comment with my hobby blog’s “gravitar”, which I did not intend to happen. There wasn’t any indication that this would happen and now I’ve crossed the streams. Bah.

      [0] look at how O’s dividend grows every quarter. Not by much, but grow it does. http://finance.yahoo.com/q/hp?s=O&a=09&b=18&c=1994&d=07&e=23&f=2011&g=v

  • DTOM November 1, 2011, 3:18 pm

    Have you looked into Vanguard’s GNMA fund? Ticker VFIIX.

    It’s similar to an REIT but it invests in mortgage-backed securities that are guaranteed by the US government. All performance measures are better and more consistent.

  • Pat February 28, 2013, 7:02 pm

    I’m working my way through your posts. My Dad left me some Riocan stock, it is great to have the steady income, and every time I pass a Riocan mall I smile. Tenants? Very diversified, and names I know – here is the list, from their website. Oh, by the way, we just had over a foot of wet snow here in Ottawa, aren’t you glad you aren’t here?

    >RioCan’s top 25 tenants are retail leaders and represent a spectrum of consumer products and services. In Canada,RioCan’s tenant list is comprised largely of the dominant retailer within the market. Of note, RioCan’s tenant portfolio is diverse, with no tenant representing more than 4.3% of total rental revenue. This diversity provides RioCan and its unitholders a stable cash flow stream and greatly reduces the exposure to any one particular tenant.

    1 Walmart
    2 Canadian Tire Corporation
    3 Famous Players/Cineplex/Galaxy Cinemas
    4 Metro/A&P/Super C/Loeb/Food Basics
    5 Winners/HomeSense/Marshalls
    6 Loblaws/No Frills/Fortinos/Zehrs/Maxi
    7 Staples/Business Depot
    8 Future Shop/Best Buy
    9 Target Corporation
    10 Shoppers Drug Mart
    11 Giant Food Stores/Stop & Shop (Royal Ahold)
    12 Reitmans/Penningtons/Smart Set/Addition-Elle/Thyme Maternity
    13 Harvey’s/Swiss Chalet/Kelsey’s/Montana’s/Milestone’s
    14 PetSmart
    15 Sobeys/IGA/Price Chopper/Empire Theatres
    16 Dollarama
    17 Zellers/The Bay/Home Outfitters
    18 TD Bank
    19 Lowes
    20 Chapters/Indigo
    21 Safeway
    22 Blue Notes/Stitches/Suzy Shier/Urban Planet
    23 Michaels
    24 The Brick
    25 Sears

  • Evan Lynch April 20, 2013, 1:09 am

    I love my REIT – I can’t remember the exact return, but I got between a 11 – 13% appreciation on the Vanguard REIT that I’m invested with, for zero effort, unlike actually managing real estate yourself. That was only one year’s return, so it may not do that well every year, but so far so good.

    The REIT I’m invested in is Vanguard’s VGSIX.

  • Propertymom June 18, 2013, 2:48 pm

    If I am doing the math correctly, then are you saying your rental house is worth over $400,000? Whoa.

    Love your blog; thank you for writing it!

    • Mr. Money Mustache June 18, 2013, 3:43 pm

      Unfortunately, yes – if you read enough of the blog you’ll see why I have this inefficient rental house. Long-term goal is to sell it and have a nice duplex or 4-plex with similar value but much higher rent.

      • Propertymom June 18, 2013, 3:55 pm

        I just started reading your blog 2 weeks ago; found it thru Early Retirement Extreme. I’m reading from the beginning, so more will become clear as I progress. Looking forward to reading more!

      • Brian October 4, 2013, 7:54 am

        MMM love your mind not sure I can take a far as you but i am trying

        Do you have any ideas for me I would like to be free in 10-15 yrs
        I am 35 yrs old with a gross income of 100k and 15% paid to taxes because of my real estate and 401k deductions
        180k in vanguard investments 401k
        100k cash
        900k in rental properties with mortgage of 760k 5% rate can’t refi bad fico score
        Monthly rental mortgage + expenses 6k
        Rental income 5k per month
        I have a free car and live in one of my rental units so my living costs are low I save 50% of my take home pay
        Any thoughts would be greatly welcome

        • GM October 13, 2013, 8:38 am

          Try “Ask a Mustachian” in the MMM forum if you want personalised answers to your individual situation.

  • Taylor October 7, 2013, 2:08 pm

    I know this is late to the game, but I’ve been reading through posts from the beginning and it takes a little while.

    A great place to hold your REIT is in a Roth IRA because the dividends are able to grow tax free. Obviously you want a well diversified portfolio but if you’re trying to decide which pile of money to purchase a REIT from it should be that one.

  • Clinton January 21, 2014, 10:35 pm

    If you start a business, the harder you and your employees work, the more money you can make. The richest people in the world got rich this way. Bill Gates got rich from starting Microsoft, Sam Walton got rich from Wal-mart. The Johnson family got rich from Johnson and Johnson, etc.

    Starting/Owning your own business:
    Advantages: Ultra high rate of return. Tax deductions.
    Disadvantages: Hard work, time could be spent doing something else, and earned income is taxed up to 35% plus payroll taxes. Repayment of borrowed money plus interest, that is used to grow the business. Lack of diversification.


    Investing in stocks/mutual funds:
    Advantages: Medium(index funds), high(undervalued individual stocks), very high(the next Microsoft, Wal-mart, Apple) rate of return, no work, spend your time doing what you want, very tax friendly(long-term capital gains and qualified dividends are tax at a max of 15%). $3,000 yearly capital loss from income deduction. Extreme diversification at extremely low cost. For the cost of one share of VT, you can own a piece of every company in all the stocks market of the world.
    Disadvantages: Risk

    Advantages: Higher return or same return as a REIT. Tax deductions.
    Disadvantages: Work. Repayment of borrowed money plus interest, that is used to buy the property. Lawsuits. Property tax. Insurance. Vacancy. Tenants that do not pay rent or make late payments.


    Investing in a REIT:
    Advantages: Medium(VGSIX), high(individual REITS) rate of return.
    Disadvantages: Risk

    • Rich January 22, 2014, 9:45 pm

      To be fair, Clinton, “risk” should be listed as a disadvantage for all of those. Some businesses fail completely, with their owners losing everything. That includes landlording businesses.

      We’ve gone the landlording route anyway, because we think the risks are worth the (current but mostly future) returns.

  • PJ December 9, 2014, 4:34 pm

    How can anyone ignore Realty Income Corporation (O)? The yield isn’t quite as high as those discussed in this article, but you are paying for quality and low risk. Realty Income pays monthly, and has paid every month since 1994 (I think that’s the year, but you get the idea). They have increased their dividend for 67 consecutive quarters. Its usually a small increase, but the quality and dependability of Realty Income is unmatched. I’m a shareholder now and will dip in every time its on sale.

  • Julia December 29, 2014, 11:06 pm

    I’m a new reader catching up on your blog. With REITs, do you get to learn about how the properties are being managed? As a NYC resident, I’m very familiar with shitty management, slumlords, etc and I wouldn’t want my money fueling that behavior. Moreover, it’s investors who are buying up properties, kicking out tenants, jacking up rent to unaffordable rates and contributing to gentrification – all in the name of providing the high return that investors want. I’d prefer to be a landlord directly and know I’m providing my tenants with decent services, while hopefully making a decent rental income.

    • Evan Lynch December 30, 2014, 12:36 pm

      This is a really good question.

      I hate to be vague, but it’s impossible to give a yes or no answer to this question. The REIT I’m invested in is an Index fund of REITs, so it’s the real estate equivalent to investing in the S&P. Which means for this particular fund, it’s really impossible to know for sure what kind of management is going on in the properties.

      As with traditional stocks, you can also invest directly in an individual REIT, in which case I imagine you would get a more detailed view on how the properties are managed, although I haven’t done extensive research into this yet so I can’t say what the prospectus of individual REITs generally say. It’s a tradeoff, however, because investing in individual REITs instead of index funds of REITs like I did is a much higher risk.

      If I were you, I would be reluctant to invest in REITs in general right now since the Fed is likely to raise interest rates relatively soon. The question isn’t whether that’s going to happen, but when it’ll happen and how quickly, which is something that’s impossible to know, but when it does happen, REITs as a whole will likely take a big hit since the real estate market is pretty sensitive to changes in interest rates. I’m probably not going to take money out of my REIT despite knowing this, but I’m definitely not planning on putting any more in.

      As an aside, given what you said here, you may be interested in checking out Socially Responsible Investing. Forbes has a good article on the concept: http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/

    • TomM April 10, 2015, 1:38 am

      Yes, I was a bleeding heart as well until I got a real nasty tenant that created more than $10,000 worth of damage to my rental property. No more bleeding heart left in me to take that. Now it’s time to make money.

  • YzTufo January 28, 2015, 1:53 pm

    I’ve been eager to write on one of this posts for a while. First off: huge fan, thank you so much!!! Having said that here i go:

    By the end of this year, together with the wife, we are buying our first apartment. Total cost 290,000,000 COP for an apartment of 65mts. (prices in Bogota are going up in an incredible rush).

    The money for the apartment comes from savings (there will be no credit needed). We have a savings rate of around 40%, once we add the money we are expending on rent it will go up to 54%.(we move around in bicycles, own no cars, but still spend a bit on weekend outings).
    On a side note, once we buy the apartment we will drastically reduce our cash savings to 20000US$ (on a savings account in the us with around .25% interest rate *a joke*)

    Our plan, if you choose to bestow your blessing upon us: (wow! big words had to look them on on google translate ;) (and the reason to answer on this post)is as follows:
    We are planning to buy a rental apartment on credit for around 180,000,000COP.(on the outskirt of the city. A developing area. An apartment with 60mts and no more than 6yrs since its construction. One with no need for fixing up). Putting down 40,000,000COP (killing our total savings) and planning to pay for it entirely in 4years. The apartment will rent for around 1,500,000COP (far from the 6% rent rate presented by the MMMan) (the rent won’t cover the mortgage… maybe around 45% of it), but better that most rates in around the city.

    To top it all off, we are planning to have childrens, also, this year! So we have to still calculate that into the bigger picture…

    So, the question is:: What’s your prognosis? Do you feel like us, that the market is very volatile (rent prices very low compared to ownership price. *Apartments are gaining around 5-10% in value year to year for the first 10years? The distance between rent and purchase is very far? does it balnce out with the possible resale price of the apartment?

    Thats it… Thank’s all again!

    a little table of conversion:
    1mts= 3.28ft
    1US$ = 2350COP (Colombian Pesos)

    • Rich Schmidt January 28, 2015, 2:07 pm

      Just FYI: according to Google 1 square meter = 10.76 square feet.

      So a 65 mts apartment = a 700 sf apartment.

    • Karen December 19, 2015, 6:21 am

      I don’t know what you ended up deciding, but I see a lot of big jumps in your plan – 1st house, 1st rental, emptying savings, and planning on children. Why not wait 4 years to buy the rental when you have the cash? This way you still have emergency funds in case something goes wrong with the 1st house or having kids.

  • YzTufo January 28, 2015, 3:06 pm

    the rate between Colombian Pesos and USD is closer to its actual number (unlike space measurement… fx does fluctuate. So I didn’t miss that one!).
    Less than a month ago the Peso was around 2450 and is getting stronger again: back then i had the chance to sell some dollars and make some money (fx really is a crazy delicate thing)


  • Calvin Johannsen July 19, 2015, 10:43 pm

    The topic of “REIT vs Rental Properties” has sent me down a rabbit hole. This discussion is gold, and to add to it…

    Can anyone chime in on this article? http://www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/

    FI Fighter explores this topic more, and counters with an argument rooted in the 4 Pillars of Real Estate, especially on Pillar #2: Principal Paydown

    Like anything, it’s good not to leave any stone unturned.

    • Perry July 31, 2015, 2:04 pm

      What’s your determination after doing some research? I thought the idea sounded cool, but I see the SNH stock has gone way down since he wrote this. I’m wondering if it’s something to avoid or if the stock is on sale and it’s an awesome time to jump in.

  • Jonathan July 27, 2015, 12:44 pm

    SNH is currently down about 23% this year and is paying out a 9.17% dividend. The dividend had been growing every 4-6 quarters, but seems to have halted at .39 cents after it hit almost $30 a share. The price has plummeted since.

    What would be a good reason to NOT jump in and buy some of this stock right now if I’m looking to put some extra money in REITs?

    I just recently moved some money from being fully in VTSMX into VGXRX and VGSIX to diversify a bit more. Those are obviously less risk than being in a single REIT, but that 9% interest rate seems tempting.

  • Wanda August 14, 2015, 9:46 am

    Short time reader, first time commenter (:

    I’ve enjoyed binge reading your blog and wanted to ask about your view on tax liens since you covered REITS?

    I picked up the book the The 16% Solution by Joel Moskowitz a while back and never figured out how to get started or what the real returns were.

    • Jim August 24, 2015, 12:31 am

      Tax lien auctions have become extremely competitive in recent years. Here in northern Arizona the average lien now goes for 4-5%, and liens on highly desirable properties are bid down to 1% or even 0%! Returns are also impacted by fees of 5 or 10 dollars per certificate charged by some counties.

      If you can attend an auction, you’ll be able to understand how they work, and most lien investors will be happy to share tips with you. However, a lot of auctions are now online only. Keep an eye out for tax lien seminars provided by community colleges and adult education centers.

      • Wanda August 26, 2015, 7:32 pm

        Hey Jim, thanks a ton. I’ll try out your suggestions!

  • stephen September 23, 2015, 5:29 am

    JLCOLLINSNH, in his Stock Series, wrote a post about “Stepping away from REITs” here: http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

    I’d be interested to hear MMM’s insights!

  • Noa December 16, 2015, 10:51 am

    If I am reading the market correctly, SNH is currently priced at just over $14 per share, an all time relative low price, with the lowest being $7 in 2000 and the highest being $28 in 2013….so it would seem the buy low idea would apply here pretty well.

    HOWEVER, take that a step further, it also looks like the dividend yield is NOT at the 7% you previously stated, but currently at 11.16%! So your 350k would earn you over $39k/year in dividends?

    Can you confirm my math here and tell me why everyone shouldn’t put a large portion of their portfolio here?

    • Mr. Money Mustache December 18, 2015, 11:33 am

      You got it, Noa – SNH has continued to pay the big dividend but their share price has dropped. I’ve looked them up occasionally over the last couple years and have not seen much news to explain the drop.

      So it’s either a screaming deal of an investment, or risky because they might be on the verge of financial instability or worse.

      To hedge on this uncertainty, I did end up buying some SNH shares myself, but only a very small percentage of my overall share holdings (most are in Vanguard index funds) – I have about $50k of SNH right now, bringing in $6000 of dividends.

    • SS December 19, 2015, 11:52 am

      Noa, these high yield companies are a sucker yield. The share price has plenty of room to fall even further. Dividend can be cut or frozen. Happens all the time. Look at all the energy companies that people were lured into with high dividend yields over the past year. That got absolutely CRUSHED.

      FYI, the SNH credit rating is BBB- (considered medium to high risk)


      This article outlines why SNH is a highly speculative stock and dives deeper into some of their recent riskier business moves.


      • Noa December 20, 2015, 11:10 am

        Fantastic responses, thank you sir SS,

        And of course the great MMM!

  • Bfinleyrad September 13, 2016, 8:47 am

    Only talking about return on market value of the property, like you do in this article, makes rental properties sound like a far worse investment than they are for most people.

    My cash flow return on my financed duplex will be around 24% per year on my up front investment (effectively more like 55% due to a special forgivable loan from the city) once I am renting both units (currently I live in one). The principal paid on the loan and the appreciation of the property are not included in those numbers. Once the loan has been paid off, it will have been paid off by money from the rent, not from my pocket.

    Point being, actual return on investment with a rental property will almost always be much higher than the return on the market value of the property, and it may not sound that way in this article. Relating back to the REITs, you could never get the same type of financing to buy shares of an REIT on a loan, and therefore you have almost no chance of getting as high of returns.

  • Gary December 9, 2016, 6:59 pm

    Do you know if you would get hit with taxes if you sold your real estate, and put that money, including capitol gains, into one of these? Thanks – Gary

    • Mr. Money Mustache December 12, 2016, 1:28 pm

      Hi Gary – I believe the answer is “yes” – the only way I know of to avoid income tax when selling appreciated real estate is through a 1031 exchange. But you probably can’t 1031 into a REIT, unless you have some very fancy lawyer/accountant skills on your side.

    • The Wealthy Accountant December 12, 2016, 2:58 pm

      MMM is right, you can’t 1031 into a REIT. The fancy accountant thing is an idea. Here is a link with a possible alternative. Not sure it is something really worth doing. The link is for information purposes only. I don’t recommend the alternative.


  • Chase June 14, 2017, 11:45 am

    I was sent this link by my brother who is looking to get into the investing world as he gets his first professional job. I currently have 3 rental properties. 2 were planned, 1 was just my old house that I decided to rent rather than sell.

    The rule of thumb that I follow (from my mentor) and that seems to be pretty common is that monthly rent needs to be 1% of the total purchase cost, preferably 1.5%. At 1%, your numbers are spot on assuming the property isn’t appreciating. My 2 rentals are closer to that 1.5% though which yields me a yearly profit of 12.7% (assumed 100k purchase) of my investment after factoring in 1.5k property taxes, 10% for the property manager, 1k in repairs, and 1k in insurance.

    The first property I got lucky and bought for 60k. It’s probably an 80k house. The rents are on the low end at 600 for each unit (duplex) which at an 80k investment is that 1.5% sweet spot. I’m killing it at 2% with my 60k investment. My other property I just bought for 96k and I plan to easily get 750 per unit (duplex). These properties aren’t expected to appreciate much if any unless I get lucky and the area becomes a hot spot. I’m still seeing 12%+ for personal RE investing rather than REIT. I have a partner to go 50/50 on each house to diversify a little more and we will C Corp each property so they’re paying 15% in taxes on profits. I assume dividends would be taxed at my current tax bracket (30-35%).

  • Kris Krause July 6, 2018, 9:40 am

    Equity REIT ETFs (not mortgage) have been serving me well. Sure the dividends are not as high as individual REITs, but I like the diversification and dependable income. Two low-cost ones are Vanguard VNQ and Fidelity FREL.

    Recently, I backed out of purchasing a property because I would get a better quarterly return (and zero property tax obligation, HOA fees, and toilet fixing) owning SNH.

    Disclaimer: I own both VNQ and FREL, but not SNH at this time.

  • João Pedro November 22, 2018, 12:38 am

    Hello all,
    For those living in Europe. I own the iShares European Property Yield UCITS ETF which gives a dividend of 3.2%.. https://finance.yahoo.com/quote/IPRP.AS?p=IPRP.AS.

  • Max May 20, 2019, 2:11 pm

    It might be time to take another look at REITs as SNH has just taken a big hit. It’s trading below $8 today and their dividend was cut to make up for it. It was as high as 15% now cut to around 7.25% (still high but stock is falling).

    My favorite dividend stocks are AT&T (ticker T) and GAIN which has been a great REIT for a while now.

    • BeastModeStash April 26, 2020, 3:45 pm

      What is going on with SNH? I followed the link listed in the article and it did not take me to Senior Housing Properties Trust. It took me to something called Steinhoff International Holdings NV. Did Senior Housing Properties Trust get acquired or go bankrupt? If so I wonder what MMM did with the $50k he invested in SNH.

      On a separate note, I would like to invest in REITs but I want to conduct proper due diligence before I choose one to invest in. Does anyone have a recommendation on a website where I can easily find the stats I need (historical dividends, cash on hand, debt, etc.)?

      • Anonymous July 1, 2020, 11:58 am

        I was curious so I looked into SHN too. Looks like the company was renamed to Diversified Healthcare Trust (NYSE: DHC) around the end of 2019. Current stock price is $4.50, and dividend yield looks to be <1%.

        I find REIT investing compelling, but stories like this make me hesitant. I would love to understand what happened to cause such a severe decline in stock value and dividend yield.


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