As one of the country’s leading financial gurus, Dave Ramsey has plenty to say about real estate. However, his approach to investing is not necessarily what you would expect from a typical investment advisor.
His strict rules against personal debt place real estate investing further down on the list of priorities than most advisors, but Ramsey still believes that real estate should have a place in your portfolio. It just has to be on his terms.
When you break down some of his rules concerning investing in real estate, they actually make perfect sense. These rules can be applied to anyone looking to take on an investment property, whether you apply the rest of Ramsey’s personal finance rules or not.
Rule #1: Make Sure You Are Ready to Invest
The biggest thing that Dave Ramsey stresses in regards to investing in rental properties is that you must do so from a solid financial position. If you are struggling to make ends meet each month with your personal finances, the stress of an additional mortgage payment is more likely to compound an already difficult situation than help improve it.
Before even considering investing in any type of real estate, you should be clear of any commercial debt and have a strong positive monthly cash flow to work with. This will make sure that you are able to handle any bumps in the road or sudden surprises.
Rule #2: Avoid Discount Properties & Expensive Properties
Ramsey recommends investing in modest properties in your community, but his reasoning is not necessarily what you might expect. It actually has more to do with the types of people who will occupy those properties than the properties themselves.
If you purchase the cheapest house in the community at a great discount, then you are naturally going to attract the type of person who rents the cheapest house in the community. These people are generally not very considerate of your time and will not be the type of people to take care of your investment.
On the other side, if you buy an expensive property in your community, your tenants might feel as if they can treat you like you work for them. These people can have unrealistically high expectations and zero respect for your time or effort.
Rule #3: Be Prepared to Make Basic Repairs
When you own a rental property, things are going to break. You will get calls in the middle of the night about toilets that don’t flush, furnaces that stop working, and locks that don’t open or close. That is just a part of the game.
However, if you possess the skills to take care of these types of minor repairs on your own, you can save yourself a fortune in expenses. Many times, the cost to have someone look at one of these simple problems far exceeds the cost of actually fixing the problem.
Rule #4 Avoid Out of State Rentals
If you are a regular listener of Dave Ramsey’s radio show and podcast, you will constantly hear him telling people to sell their out of state rentals, even if they have to do so at a severe loss.
His logic is simple, you can’t possibly do a good job keeping an eye on your investment if you have to drive across state lines to do so.
If you can’t keep a close eye on your investment, how will you know whether the tenants are taking care of things or if the regular maintenance is being handled properly? (It’s worth noting that Ramsey is talking about regular rental properties here and not necessarily vacation homes!)
Rule #5 Work With a Real Estate Professional
You might expect that a financial guru like Dave Ramsey would be able to do his own research on what properties to invest in, but that is not necessarily the case. Ramsey believes in working with qualified local experts who have the same belief structure that he does.
Even if you ignore the first four rules, if you are going to invest in real estate you should always work with a local real estate professional that shares your values and beliefs. Not only will you have someone to double check your figures, you will also have a second set of eyes when walking through a property or filling out the paperwork.
Investing in real estate is a tough business. On the surface, it appears to be quite simple, but there is much more to it as your dig deeper. Listening to the advice of financial experts like Dave Ramsey is always a good idea, especially if you are just getting started in the business.