The Dave Ramsey Dilemma: Should Real Estate Investors Really Avoid Using Debt?
Dave Ramsey has become a very visible media pundit, author, and speaker. Some of his events are so expensive to attend that you have to go through a phone sales pitch in order to be able to get the pricing (you just can’t book or buy tickets online). There is no question that he has commissioned some solid research and has written some great tips on getting out of bad debt. But many find it almost impossible to find a way to mesh his approach to money with what really works when it comes to investing in real estate.
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Dave Ramsey 101
Dave Ramsey went broke in real estate. That has given him a lot of good experience, but has also made him extremely cautious. Some might argue this is like the market over-correcting.
The main philosophy of Dave Ramsey is that ALL debt is bad and that you must get out of borrowing ASAP and use only all cash going forward.
This can make great sense for getting out of “bad debt” such as credit cards, student loans, car loans, etc. His systems can certainly help those who struggle with these issues.
However, this overall approach isn’t always very effective for investing in real estate. First, it is worth noting that many overlook the fact that Dave Ramsey actually does say it is OK to use mortgage loans to buy real estate. He even promotes for a mortgage company. Still, this particular piece of advice is geared towards buying the property as a home versus an investment.
This is because what makes real estate so powerful is the use of leverage (which is “good debt” that is paid by others). Done right, this can actually be the fast track to getting out of all other debt faster, while getting a head start on building up wealth and passive income for retirement.
Yes, even good debt can be a gift and a curse depending on whether used correctly or incorrectly. But used wisely, it does wonders. I mean, I can go buy a multifamily property for $1M cash, or I can put down $250,000 and leverage the rest, then use the $750,000 to go buy 3 more similar properties.
Would you rather earn appreciation and income on a single $1M worth of property or $4M worth of property in a portfolio? Having all cash in a deal for a single investor is also highly risky due to exposure. That’s why sophisticated homeowners and investors typically take out mortgages, even when they don’t need them. I mean do you think Mark Zuckerberg really needed a loan to buy his home?
Dave’s approach to money can be frustrating and effectively make many methods of investing and getting ahead impotent. If you have piles of cash, you can do it — but it still may not be the best choice. At the very least, it will make your process super slow if you’re trying to save to buy buildings for cash — and, of course, that is a risk, too. Good leverage can be very good and safe if used wisely. Though if you are determined to get in without borrowing a penny, you can start generating income via debt and equity partnerships, crowdfunding, or even wholesaling real estate.
[Editor’s Note: We are republishing this article so our newer members can enjoy it.]
Investors: Where do you fall in this debate? Do you think it’s necessary to use debt to build a real estate portfolio?
Let me know with a comment!