How rental property really works
The assumption that tenants take care of the payments every month hinges on a misguided assumption that rent payments are predictable, reliable and consistent. In the real world, Ramsey explains, that’s simply not true.
“Anybody who’s ever had a renter or been a renter, and I’ve been both, I have been a renter too, knows that sometimes renters don't pay,” he says. “Sometimes, there’s cancer. Sometimes, there’s car wrecks and job loss. Sometimes, there’s a pandemic.”
Ramsey calls it a “ridiculous assumption” that renters provided a steady stream of income every month that investors can rely on to make their “stupid little payment” every month.
Indeed, 42% of Americans said they don’t have an emergency savings fund, while 40% say they can’t deal with a $1,000 emergency expense — despite 60% of them reporting facing an unexpected cost in the past year, according to a survey by U.S. News. In other words, an unexpected medical bill or vehicle breakdown could delay rent payments.
As of November 2024, 14% of renters had faced a late fee on their rent payment within the past 12 months, according to the Consumer Financial Protection Bureau. That ratio was 23% in early-2023.
Missed and late payments are only some of the risks landlords face. In the 50 largest metros across the U.S., it is now cheaper to rent a property than buy one, according to Realtor.com. The combined costs of mortgage interest, taxes, maintenance and homeowners association dues can be higher than the rent available in certain cities, which means the rental property is cash flow negative.
Put simply, many landlords are actually paying more for their property every month than the tenant is paying them. If cash flow isn’t properly managed, a sudden rise in interest rates or unexpected maintenance costs could derail the rental business.
For those looking to invest in real estate, here’s how you can mitigate these risks.
Invest in real estate without the headache of being a landlord
Imagine owning a portfolio of thousands of well-managed single family rentals or a collection of cutting-edge industrial warehouses. You can now gain access to a $1B portfolio of income-producing real estate assets designed to deliver long-term growth from the comforts of your couch.
The best part? You don’t have to be a millionaire and can start investing in minutes.
Learn MoreSavvy rental investments
If you’re considering buying real estate for passive income, it could be a good idea to include a margin of safety in all your financial assumptions.
Experienced investors often assume that the property will be vacant for a while or that some rent payments will be missed or delayed. Be sure to keep some extra cash on hand to cover the mortgage when tenants miss their obligations.
You could also keep some funds available to meet unexpected repair costs.
Another way to mitigate the risks is to conduct due diligence. Buy property in prime locations that attract good, reliable tenants and seek out credit scores or past references from prospective tenants before they sign the lease.
As a landlord, you should remember that the tenant has no obligation to ensure you don’t miss mortgage payments, ruin your credit score or lose money on the venture. It’s on you to ensure your investment keeps running smoothly.
For those who are less interested in the work associated with investment properties, there are other ways to dip your toes into real estate — without having to become a landlord. These days, real estate investment trusts (REITs) give investors access to a slice of the income made through commercial real estate investments without actually having to buy or manage any properties themselves.
Crowdfunding apps are another great opportunity for investors these days to get access to prime real estate investments at a far more accessible price point.
With a little savvy investing, before too long, maybe you’ll be the one giving Ramsey investing advice.
The richest 1% use an advisor. Do you?
Wealthy people know that having money is not the same as being good with money. Advisor.com can help you shape your financial future and connect with expert guidance . A trusted advisor helps you make smart choices about investments, retirement savings, and tax planning.
Try it now
