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:

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.