Knowing that real estate can be a terrific investment, you’re excited to buy your first property. You tell yourself that sitting back and collecting that sweet rental income will be easy — so easy, in fact, that it feels like passive income.
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Until you get that late-night call about a flooding bathroom. Or the lawn needs to be mowed between tenants. Suddenly, your real estate investment feels like active labor instead of passive income.
Dave Ramsey could’ve told you as much. He’s been cautioning people not to think of real estate as a source of passive income for a while — precisely because of how much work can be involved. Most recently, he took to X to say, “There’s nothing passive about owning real estate. It’s active.”
While he’s quick to add that real estate is a wonderful investment, it’s important not to go into it expecting passive income.
You’ve Got To Work To Keep Up Your Property
To Ramsey, mutual funds are better examples of passive income: “They send me a statement in my inbox,” he quipped.
It’s a version of the advice he gave one reader who sold his rental home after lamenting that the “work and hassle” of maintaining it was too much. Ramsey responded with some playful ribbing about what the reader might have expected:
“You mean you had to actively manage your rental property? Listen, anyone who tells you real estate is passive income is full of crap.”
Why does he say they’re “full of crap”? Because fixing leaky roofs, replacing worn-out appliances or chasing down rent from tenants is hardly passive.
“If you want passive income, buy an S&P 500 index fund,” Ramsey said. “Set it and forget it.”
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You Have To Manage the Management Company
Let’s say you know enough to know what you don’t know — and that includes home repair. So, you hire a management company to handle everything for you. Maybe it makes some things easier, but it still won’t turn your rental property into a passive investment.
Speaking to a caller who described his interest in real estate as “passive income,” Ramsey reminded him that even hiring a property manager still requires effort.
“Even if you’re managing the management company, they’ve still got to call you and approve the $8,400 new heating and air system that blew up,” he said.
To drive the point home, Ramsey shared a story about a call he received from the company managing one of his commercial properties — regarding a $26,000 repair.
“Didn’t feel passive to me at all,” he deadpanned.
Renters Will Not Make You Rich
Ramsey wants aspiring real estate investors to avoid bad advice from what he calls “get-rich-quick websites,” where people with no experience paint a rosy portrait that makes it seem like renters will subsidize everything.
“Nope, you’re going to pay for it, and maybe the renters pay you,” Ramsey said. “That’s how it works in the real world … This idea that you’re going to build a portfolio of heavily debt-ridden real estate and the renters are all going to make you rich is so freaking laughable that it makes my head spin.”
The Smarter Approach to Real Estate Investing
While he doesn’t want you to conflate real estate with passive income, Ramsey still believes that investing in property — when done correctly — can be worthwhile.
He advised the young caller to focus on building a robust emergency fund and solid retirement portfolio, as well as paying off his own home before jumping into real estate. He also emphasized buying rental properties with cash.
Most importantly, any aspiring investor should proceed with a clear understanding of how much work is involved.
For those who aren’t eager to take on the manual upkeep or tenant management, Ramsey recommended considering a real estate investment trust (REIT). He suggested investing in a REIT only if you’re completely debt-free — including your home — and you’ve already maxed out your tax-advantaged retirement accounts.
“If you’re going to invest in a REIT, choose a fund with a long track record of strong returns that’s run by a group of investors who know what they’re doing,” he said. “Finally, don’t let your REIT investments exceed 10% of your net worth.”
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This article originally appeared on GOBankingRates.com: Dave Ramsey Says Real Estate Can Be a Great Investment but Don’t Expect It To Be Passive Income
