Dave Ramsey: Don’t Buy a Rental Property Before You Do These 5 Things
Written by
Ashleigh Ray, AI Editor
Edited by
Ashleigh Ray
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When you hear people buzzing about the benefits of rental properties as a source of passive income, you might be tempted to jump right in.
But, as Dave Ramsey advises in an article on Ramsey Solutions from earlier this year, there are a few crucial steps you need to take before you dive into the world of real estate investing.
Here’s a look at the key preparations and precautions you should consider based on Ramsey’s guidance.
Ensure Your Financial Foundation Is Solid
Before even considering a property purchase, Ramsey stresses the importance of having your financial house in order. This means being completely debt-free, including your own home mortgage.
Additionally, Ramsey says you should have a fully funded emergency fund that covers 3-6 months of expenses. It’s also crucial to be investing at least 15% of your income into retirement accounts like 401(k)s and IRAs.
Investing in real estate should never compromise your ability to maintain these financial basics.
Pay in Cash
Ramsey is a strong advocate for buying your rental properties outright with cash.
Why? It eliminates the risk that comes with debt — such as mortgage payments — which can be particularly burdensome if your property goes unrented for a period, or you face unexpected major repairs.
Paying in cash also ensures any rental income you receive goes straight to boosting your net worth rather than servicing debt.
Choose the Right Location and Property Type
Location can make or break your rental. Look for properties in areas with good schools, reputable neighborhoods and steady appreciation in property values.
Consider the type of property that best suits your goals and capabilities — whether it’s residential, commercial or even a vacation rental. Local properties are generally preferable for your first investment, as they allow you to keep a close eye on the property and respond quickly to any issues.
Get Professional Help
Investing in real estate isn’t a solo journey. Look for experienced professionals who can guide you through the process. A knowledgeable real estate agent can help you find the best deals in your target market and assist with negotiations and paperwork.
Consider also hiring a property management company if you prefer not to manage day-to-day tenant interactions and maintenance issues yourself. These professionals can handle everything from tenant screening to emergency repairs, though their fees will cut into your profits.
Prepare for Landlord Responsibilities
Despite the potential for passive income, being a landlord is an active role that involves more than just collecting rent checks. Be ready to deal with tenant management, property maintenance and the legalities of real estate investment.
If you choose to manage the property yourself, ensure you understand landlord insurance, building codes and the rights of tenants. Maintain a proactive relationship with your tenants to prevent issues and ensure smooth operations.
When Should You Consider Investing?
Only consider diving into rental property investment once you’ve checked all the boxes above. You must be financially stable, well-informed and fully prepared for the responsibilities of being a landlord.
No investment opportunity, including real estate, is worth jeopardizing your financial health or long-term financial goals.
By addressing these areas and preparing thoroughly, you’ll enhance your chances of success and profitability in the real estate market. Investing in rental property can indeed be a lucrative venture if done wisely and with ample preparation, as Dave Ramsey recommends.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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