Dave Ramsey: How To Avoid Major Mistakes First-Time Real Estate Investors Make
Written by
J. Arky
Edited by
Zuri Anderson
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As someone who has owned over 2,000 pieces of real estate in his lifetime, Dave Ramsey has some keen insights on how to deal with financial disaster when it comes to property ownership. The key: Prepare to not have rental payments cover all your expenses or even show up on time, every time.
In a recent clip from the Ramsey Show, Ramsey shared that, “One thing I know for sure is that if you tell me that renters are going to pay their payments for you, that tells me you’ve never managed a rental property.”
Here’s how to avoid this crucial mistake, and others, as a first-time real estate investor.
Unreliable Rental Payments
Ramsey, who owns several million dollars of real estate currently, went on to explain that “anybody who has ever had a renter or been a renter… knows that sometimes renters don’t pay.”
This could be due to any number of reasons: Health issues that end up being expensive, the loss of a job and stable income or a costly vehicle repair that wipes out a renter’s savings.
Anyone who decides to buy a piece of property to rent out to someone as a residency or business should not rely on a steady stream of payments, cautioned Ramsey.
Prepare To Spend More
Other issues that can arise for first-time real estate investors are timing and preparation. If someone jumps into the real estate market at the wrong moment, without having properly done their homework, or prepared for the unexpected, disaster usually strikes.
“I’ve seen ‘investors’ get into the business especially during the recession,” recalled Jeff Lichtenstein, the CEO of Echo Commercial Properties in Palm Beach Gardens. “There wasn’t a vacancy problem and often costs in the beginning to keep up the house are negligible.”
From that point on, though, Lichtenstein warned that there are lots of expenses and unforeseen costs which all add up. Both first-time and veteran real estate investors need to be prepared for these expenditures on their own, not simply relying on rental payments to cover all the costs.
Lichtenstein described how big ticket items like the roofing, HVAC, water, and style changes can rack up a huge bill, which is why a separate bucket of funds for repairs, emergencies and unexpected damages should be set up as the cost of doing business in the real estate market.
Making the Tough Call
If owning a piece of rental property is not panning out and first time real estate investors find themselves under water, it might be time to plan one or more exit strategies advised.
“Having the best case scenario is a start, but having a range of acceptable scenarios for exiting is necessary,” explained Kristina Chervenka, the COO and co-founder at Five Buffalo Capital, LLC.
“Some investors go into a real estate investment with only the highest and best exit strategy in mind but between acquiring and selling, there may have been an increase in expenses and now their exit and their returns are negative.”
Chervenka highlighted the importance of being able to track expected returns and updating the model as a way to help guide decisions for when an exit may need to occur ahead of schedule.
“This is crucial in seeking to yield the best possible results and in understanding when to look for additional capital ahead of a downturn and how to weather that storm,” she added.
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