Personal finance expert Dave Ramsey says those looking for passive income should choose mutual funds over real estate because property management is full of hassles and money doesn’t flow in effortlessly.
‘There’s Nothing Passive About Managing Real Estate’
Teddy from New York called into “The Ramsey Show” to ask whether buying real estate was a smart way to generate long-term passive income. Ramsey said he “loves” real estate but stressed that rental income is not passive and requires active involvement.
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He said the idea that real estate is easy, passive income comes from the internet and isn’t realistic.
“I’m all for you buying some real estate, but when idiots on the internet say real estate is passive income, that means they’ve never owned any,” Ramsey said. “There’s nothing passive about managing real estate, nothing whatsoever. You want passive? Buy a mutual fund, they’ll just put the check in your mailbox and you won’t think anything about it.”
Ramsey told Teddy to focus first on his career, pay off his home, and invest consistently in his 401(k) before considering buying real estate with cash.
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‘It Makes My Head Spin’
Ramsey said it is a misconception to think that owning multiple properties guarantees easy monthly rent with no expenses. He said landlords can face major costs in maintenance and repairs, such as a failed heating and air system or a broken sewer line.
“This idea that you’re going to build a portfolio of heavily debt written real estate and the renters are all going to make you rich is so freaking laughable that it makes my head spin,” he said. “It’s all by people who have never done it before.”
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Ramsey said buying real estate with debt and expecting it to automatically make you wealthy is a major mistake he also made when he was young. He said that within three years he went from nothing to a million-dollar net worth by using a strategy that relied on buying properties on credit, only to lose it all later.
“I bought a property, made money on it, bought another property, made money on it, every time I made money, the banker gave me more money,” Ramsey said. “It was a nice formula until it wasn’t nice anymore.”
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