Real estate has helped create countless millionaires, but according to personal finance expert Dave Ramsey, many investors make the mistake of assuming that rising property values can fix a bad investment.
During a recent call on “The Ramsey Show,” Maggie asked for advice about a California condo she and her husband had turned into a rental after moving to South Dakota. The property was worth roughly up to $399,000, carried a mortgage balance of about $309,000 and was barely breaking even as a rental.
“If you had this amount of money piled on the kitchen table, you would never go do this deal,” he said. “Not in a million years. No sane person would.”
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Maggie explained that her husband wanted to keep the condo because he believed property values would continue rising and renters would always be available. Ramsey said that thinking is one of the most common mistakes investors make.
His issue wasn’t with real estate itself. In fact, Ramsey said that much of his own net worth is tied to property investments. The problem was the specific investment.
“Property values in real estate do not go up fast enough to offset a bad idea,” Ramsey said. “I’m big on real estate. I want you to own real estate, but this real estate, you don’t own this real estate. It owns you.”
The couple lived several states away from the condo, making them long-distance landlords. The property wasn’t generating meaningful cash flow, and they were still carrying more than $100,000 in consumer debt.
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Would they choose to use that money to buy a long-distance rental in California that barely paid for itself?
The answer, he argued, was obviously no.
“This is a bad deal,” Ramsey said. “Sell it. Sell it. Sell it. If this renter doesn’t buy it, put it on the market and sell it anyway. Get rid of it.”
Why Appreciation Alone Isn’t Enough
A lot of investors put too much weight on how much a property might go up in value over time. While rising prices can definitely help your returns, Ramsey says that kind of growth should be a bonus on a solid investment, not something you rely on to fix a bad one.
He pointed out that if the property experienced vacancies, repairs or unexpected expenses, the investment could quickly move from break-even to losing money.
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The caller also revealed that the tenants were interested in purchasing the condo, creating what Ramsey described as a potential “get out of jail free card.” Selling could allow the couple to eliminate roughly $108,000 in consumer debt and free up about $4,000 per month in debt payments, dramatically improving their monthly cash flow.
For investors who like the idea of real estate but don’t want the challenges of being a landlord, alternatives have become increasingly popular.
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