Dave Says: Investing in Rental Homes

Dear Dave,

My husband is into estate investment properties. He’ll buy a run-down house for very little money, fix it up and then rent it out. The debt we’re racking up makes me nervous. Each house has a loan, but he says it’s okay because we can sell them. Can you give me any advice?

– Carol

Dear Carol,

I went broke years ago doing exactly what your husband is doing right now. I’ve known several others who went broke doing it, too. Lots of folks in real estate tend to believe that debt is okay so long as the property is worth more than the debt, but there are several downsides to that kind of thinking. At the end of the day, the borrower is always a slave to the lender. And I’m afraid your husband may be on that path.

At best, this kind of thinking will make for lots of uncertainty. The worst-case scenario has you guys ending up bankrupt, just like we did. My experience way back when is proof that things like this can quickly escalate out of control when you make debt one of your building blocks.

There’s nothing wrong with investing in real estate, but I recommend that he do it much more slowly – and with cash!

– Dave