Although real estate may not be as foolproof or lucrative of an investment as it once was, finance mentors like Dave Ramsey still swear by the asset class as a first step to growing wealth.
In a recently resurfaced (1) interview with comedian Theo Von, Ramsey touched on his extensive forays in both commercial and residential property, saying that buying your first home is “a key part of the first $1 to $10 million in net worth that somebody builds.”
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He added that real estate can easily produce greater gains than the standard mutual fund — up to 20% — not because of the rapid price appreciation (2) and high flipping yields (3) that were once a boon (2) to the sector, but through long-term, stable rental income.
But, he had some major caveats for those who think juggling units is an easy path to riches.
The idea that real estate = passive earnings is “bull crap”
Ramsey, who himself helms a $850 million (4) real estate portfolio, has become exasperated by TikTok and Instagram creators who position multi-unit ownership as a great way to passively earn some extra cash.
“I hear this stuff on social media that real estate is ‘passive’ income — bull crap, there’s nothing passive about it,” Ramsey told Von on a spring 2024 episode (1) of the entertainer’s This Past Weekend podcast. “Your butt’s active, you’re right in the middle of it. Or you’re getting screwed, one of the two.”
While mutual funds serve as a “set it and forget it” type of holding, Ramsey assured amateur investors enthralled by the somewhat glamourized concept of landlordship that real estate is a completely different ball game.
“The problem with real estate is it’s a pain in the butt, you’ve gotta deal with it,” he told Von. And he hasn’t been shy to list the flurry of expenses and tenant issues that can and do pose serious financial setbacks in the past.
“I love real estate. But all of mine are paid for, and still, with repairs and vacancies, some of them hardly make money,” Ramsey has warned on his own show (5). “When you don’t get a renter, or one doesn’t pay, or you put in a heat and air system for $14,000 [on top of] property taxes and insurance…. you don’t get a ton of cash flow.”
But, the multimillionaire said, if you start by hitting these benchmarks, can deal with the hassle of having to maintain a place day-to-day, and can get over the “naive and incomplete” idea that any dollar in rent earned over basic monthly payments like the mortgage is guaranteed cash flow, “over the scope of time, you’ll be making money, without a doubt.”
A few other crucial tips that he offered: ensure you run a tight ship as far as managing your property, and be extremely conscientious about your land acquisitions, focusing on low-price units that you can actually afford to pay for, ideally up front.
Some caveats to Ramsey’s caveats
Ramsey is right to warn eager would-be homebuyers that landlording isn’t always all it’s cracked up to be on social media. But, are there any ways that real estate can provide truly passive income?
Real Estate Investment Trusts (REITs) are known for having strong and consistent dividends, along with offering protection from the risks of direct ownership (and even higher annual returns). Though earnings can fall lower than other asset classes depending on the mercurial overall market and lending rates — with mortgage REITs being more volatile — they are an easy-entry, highly liquid, fairly hands-off way to invest in the segment.
Crowdfunding is another means to dabble in real estate without the labour-intensiveness of your own income-generating property. By participating in a crowdfunded development, you open yourself up to a portion of the project’s future profits — but also, its losses. Unlike REITs, there is no safety net of diversification, your stake is usually locked in for a set period of time, and there can be some barriers to access. But, there’s also more autonomy, and the chance for higher returns.
Joint ventures and fractional ownership are worth mentioning as well, as they are more passive investments than purchasing private property on your own. It should be noted, though, that they require investors to take a more active role than the two aforementioned products.
Short-term vacation rentals are also an option for those seeking something a little more adventurous than being a traditional landlord. Short-term rentals offer more flexibility and can net more income than long-term rentals, especially if they are in strategic, desirable areas. (Bonus: no rent control policies or tenancy disputes!) But, they require a more active owner role, unless you’re okay with handing over a portion of your revenue to a management company.
Still, if we’re talking about the level of time and work involved, all of the above — including owning a long-term rental — are arguably more passive ways to increase your earnings than taking on a part-time job or alternative side hustle.
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YouTube (1),(5); Yahoo Finance (2); Realtor.com (3); Benzinga (4)
This article originally appeared on Moneywise.com under the title: Dave Ramsey sits on $850 million in real estate — and says anyone who calls it ‘passive income’ is lying
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