Fresno man with $175K to burn says he's eyeing a rental property, maybe 2 — but Dave Ramsey warns that real estate dreams can easily become nightmares

But instead of answering, host Dave Ramsey offered Bobby a bright red warning.

“When you talk about rental property, people particularly struggle with one issue,” Ramsey responded in a clip posted Aug. 13. “Debt equals risk. More debt equals more risk.”

Here’s the lesson Ramsey, who owns hundreds of millions of dollars worth of real estate himself, bestowed upon Bobby.

Risks and hidden costs

Ramsey went into further detail about the risks of investing in rental properties.

“More debt equals lower cash flow, less cash position and more risk,” he explained.

Putting everything into one property lowers debt and can simplify management, but even one lengthy vacancy or major repair bill could derail your financial situation. Multiple properties may mean more rental income, but it comes with increased debt and a bigger chance things could go wrong.

“So, when you don’t get a renter for four months, or one doesn’t pay for three months, or you put in a heat and air system that’s $14,000, or you have to put on a roof because it’s leaking, and you’ve got to pay property taxes and insurance … it is an incomplete picture when you don’t consider all the expenses,” Ramsey said.

Bobby could make some of these costs less painful by putting aside funds for expenses. Some experts say investors should expect 50% of gross income to go toward operating costs. This includes property taxes, home insurance, maintenance, repairs and utilities. It should be noted, however, mortgage payments are excluded from this list.

These hidden costs can cut down on cash flow, even after a chunky down payment like the one Bobby can make.

“Real estate is an excellent investment, but it is an investment that requires a cash position,” said Ramsey, who recommended Bobby wait until he could pay for the second home in full.

Co-host George Kamel noted Bobby was already on track to do just that.

“The good news is you saved up $175,000,” Kamel said. “[You’re] $120,000 short of [that] goal. That's a solvable problem.”

To pay cash or not to pay cash?

Paying for a house all in cash may be ideal, but is it realistic? The price of housing has gone up significantly in recent years, which has made even purchasing a home as a primary residence a difficult prospect. Plus, as Ramsey noted, debt comes with risk. If you’re investing in a rental property it’s best to avoid over-leveraging.