Dave Ramsey says when he hears 1 thing about US real estate, it’s a red flag they’re ‘novice at best’ and ‘idiot at worst’ — here’s the ‘ridiculous assumption’ Americans often make

Here’s why the entrepreneur and veteran investor, who says he’s owned more than 2,000 properties worth “several hundred million dollars,” dismisses this common misconception.

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.

Savvy 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.