Although real estate may not be as foolproof or lucrative an investment as it once was, financial mentors like Dave Ramsey still swear by this asset class as a first step to increasing wealth.
In a recently resurfaced interview (1) with comedian Theo Von, Ramsey discussed his extensive forays into both commercial and residential real estate, saying that buying your first home is “a key part of the first $1 to $10 million in net worth someone builds.”
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He added that real estate can easily produce higher returns than standard mutual funds (up to 20%), not due to the rapid price appreciation (2) and high yields (3) that were once a boon (2) for the sector, but through stable and long-term rental income.
But he had some important warnings for those who think that juggling units is an easy path to wealth.
The idea that real estate = passive income is “nonsense”
Ramsey, who runs an $850 million real estate portfolio (4), has become exasperated with TikTok and Instagram creators who position multi-unit ownership as a great way to passively earn some extra money.
“I hear things on social media that real estate is ‘passive’ income; shit, there’s nothing passive about it,” Ramsey told Von in a spring 2024 episode (1) of the artist’s This Past Weekend podcast. “Your ass is active, you’re right in the middle. Or you’re getting fucked, one of the two.”
While mutual funds serve as a set-it-and-forget-it holding, Ramsey assured amateur investors enthralled by the somewhat glamorous concept of real estate ownership that real estate is a completely different ballgame.
“The problem with real estate is that it’s a pain in the ass, you have to deal with it,” he told Von. And he hasn’t been shy about listing the avalanche 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 yet, with repairs and vacancies, some of them are barely making any money,” Ramsey warned on his own show (5). “When you don’t get a tenant, or one doesn’t pay, or you install a heating and air system for $14,000 (on top of) property taxes and insurance… you don’t get a lot of cash flow.”
But, the billionaire said, if you start by hitting these benchmarks, you can deal with the hassle of having to maintain a place day to day and you can overcome the “naive and incomplete” idea that any dollar in rent earned on basic monthly payments like the mortgage is guaranteed cash flow, “over time, you’ll be making money, without a doubt.”
Some other crucial advice he offered: Make sure you manage your property rigorously and be extremely conscientious with your land purchases, focusing on low-priced units that you can actually afford to pay for, ideally upfront.
Read more: This billion-dollar private real estate fund is now accessible to non-millionaires. Start investing with just $10
Some caveats to Ramsey’s warnings
Ramsey is right to warn eager potential home buyers that the property is not always as good as it seems on social media. But is there any way real estate can provide truly passive income?
Real estate investment trusts (REITs) are known for having strong, consistent dividends, while also offering protection from the risks of direct ownership (and even higher annual returns). Although returns can fall below other asset classes depending on the fickle overall market and interest rates (with mortgage REITs being more volatile), they are a form of investment in the easy-entry, highly liquid and fairly hands-off segment.
Crowdfunding is another way to get into the real estate sector without the large amount of labor involved in having your own property that generates income. By participating in a crowdfunded development, you open yourself up to a share of the project’s future profits, but also its losses. Unlike REITs, there is no diversification safety net, your participation is typically locked in for a set period of time, and there may be some barriers to entry. But there is also more autonomy and the possibility of obtaining higher returns.
Joint ventures and fractional ownership are also worth mentioning, as they are more passive investments than purchasing a private property on your own. However, it is worth noting 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 looking for something a little more adventurous than being a traditional homeowner. Short-term rentals offer more flexibility and can generate more income than long-term rentals, especially if they are located in strategic and desirable areas. (Bonus: no rent control policies or lease disputes!) But they require a more active landlord role, unless you agree to hand over a portion of your income 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 income than taking on a part-time job or an alternative side hustle.
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Article sources
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YouTube (1), (5); Yahoo Finance (2); real estate agent.com (3); Benzinga (4)
This article originally appeared on Moneywise.com with the title: Dave Ramsey Has $850 Million In Real Estate And Says Anyone Who Calls It “Passive Income” Is Lying.
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