Personal Finance Expert Dave Ramsey Says those looking for passive income should choose mutual funds over real estate because property management is fraught with hassles and money doesn’t flow in easily.
Teddy from New York called “The Ramsay Show” to ask if 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 participation.
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The idea that real estate is easy and that passive income comes from the Internet is unrealistic, he said.
“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 real estate,” Ramsey said. “There’s nothing passive about managing real estate, nothing. Do you want passive? Buy mutual funds and they’ll just put a check in your mailbox and you won’t think about anything.”
Ramsey told Teddy to first focus on his career, pay off his house, and keep investing in his 401(k) before considering buying real estate with cash.
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Ramsay says it’s a misconception that owning multiple properties guarantees easy monthly rent payments with no fees. Landlords could face significant maintenance and repair costs, such as heating and air system failures or broken sewer lines, he said.
“The idea that you’re going to build a debt-laden real estate portfolio where the tenants are all going to make you rich is so ridiculous it makes my head spin,” he said. “This is all being done by people who have never done it before.”
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Ramsey said going into debt to buy real estate and expecting it to automatically make you rich was a big mistake he also made in his youth. He said he went from nothing to a million-dollar net worth in three years through a strategy of buying properties on credit, only to lose it all.
