Dave Ramsey Investment Approach
Centreville, AL · Member since 2016 · 8 posts · 9 votes
Dave Ramsey Investment Approach
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Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9yI followed Dave's debt snowball plan and baby steps to get out of consumer debt ($87k), but don't pay all cash for rentals.
Dave was burned by callable real estate mortgage notes back in the 80's. The long-term fixed products we use today wouldn't have been able to bk him like those did.
I use intelligent leverage for RE and try to stay at or below 80% to avoid PMI. I am accelerating commercial mortgages because they are higher risk (adjustable and callable), but for long-term, fixed residential mortgages with strong down payments I would and do use those @Cody Brown.
29 Replies
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
I've done it. It is a get rich slow plan that guarantees that you don't get foreclosed. The cash flow is awesome too because no debt. If you have a vacancy, no big deal. The down side is that it takes a while to get the cash for the first few, but once you have 3 or more properties it goes much quicker.
- 9yAlex ShaughnessyPro MemberReal Estate Investor · Spring Valley, CA · Member since 2016 · 288 posts · 98 votes
It really depends on you as a person. There is so much that you could say about each strategy. I think most people that understand the art of leverage do not follow dave ramsey. however, zero debt can lead to better sleep each night for certain people. Following Ramsey will take a lot longer to aquire assets. Its definitely slow and steady paced. I apologize, my articulation is a bit off today. But good luck either route you chose.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes9y
I followed Dave's debt snowball plan and baby steps to get out of consumer debt ($87k), but don't pay all cash for rentals.
Dave was burned by callable real estate mortgage notes back in the 80's. The long-term fixed products we use today wouldn't have been able to bk him like those did.
I use intelligent leverage for RE and try to stay at or below 80% to avoid PMI. I am accelerating commercial mortgages because they are higher risk (adjustable and callable), but for long-term, fixed residential mortgages with strong down payments I would and do use those @Cody Brown.
- Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes9y
1 of the beauty of real estate is to use OPM (other people's money) and leverage yourself.
If you run the numbers properly, do your due diligence well and have enough reserves, you can get a high % return on your money.
Ultimately it depends on your risk tolerance and investing style.
- Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes9y
I enjoy a debt free life (minus mortgage/student loans), however IMO real estate debt isn't the same. You didn't get debt buying the newest shoes, the debt you acquire is needed to make your investment profitable and income producing, so it's not apples to apples. I mentally separate myself, business income/debts are the businesses, and mine are mine.
If you are responsible, and can handle debt--it's a powerful tool to leverage yourself, but most people can't. If I didn't take on debt, I'd never be in the situation, but I went into it with a plan and a strategy.. if you can do that, you're good to go in my book.
- Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes9y
In theory, it is a neat idea and fits with his philosophy of no debt. And nothing cash flows like a paid off rental. Had a few of those, but paid them off over time (not right out of the box). Fun to sell, too (owner finance or for cash).
But in reality, in many markets (especially both coasts and high priced cities in between) paying all cash for a rental is out of reach for most average investors. I have never ponied up 100% cash and probably won't in the near future.
Or most folks may be 55- 65 years old before they get a 1/2 million + nest egg for the first property.
And by then retirement may be the next goal rather than starting up real estate investing. "Come on, grandchildren, let's skip Disney World this summer and go paint Grandpa's first fourplex!" Not so much fun to me.
I like Dave Ramsey's show alot and also think --like Steve Vaughn--that Ramsey had a financially traumatic experience with too much debt that is instructive for him and some listeners (especially those with debt problems). Though the same rule may not apply to all and has some exceptions.
Maybe as an analogy it is like alcohol or something. Having binged (and bankrupted), Ramsey will never touch the stuff and many of the people who listen to his popular show also have serious debt problems (and neat recovery stories--no debt screams--too, etc).
But if you can use debt responsibly, and in moderation, it can be a tool. Let's not forget the power of leverage, opportunity costs, and the deductible nature of this type of debt, so there are pro's to go with any con's.
Yes, too much exotic, zero down, fog a mirror debt on overpriced real estate is very bad ( like downing a 40 Oz. wrapped in a brown paper in 5 mins outside the liquor store). Bad debt. Seldom ends well.
But also like Steve V. mentions, an 80%, fixed long-term, low interest rate mortgage on a solid multi unit property with strong cash flow in a good location/market--that is like one small glass of red wine (supposed to be good for you I hear) at dinner. Good debt... or at least I would take it any day (the wine or the loan).
Best of luck!
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes9y
Love the analogy to alcohol @Michael Boyer and great story with the grandkids painting the rental vs going to Disney!
I say it kind of like this. Dave was burned by a hot stove in 1986. Dave doesn't cook anymore on a stove. He warns everyone else of the dangers of a stove. The responsible can grasp that a stove gets hot, but many of his listeners are not yet ready and should not cook at all. "Dave - my car is worth more than my house, but I'm upside down on the car. What do I do?"
Most of us that are investing responsibly understand the dangers of a hot stove. Cheers!
- Centreville, AL · Member since 2016 · 8 posts · 9 votes9y
Thanks so much everyone! You've all been a big help. Id really like to be able to buy my first with 100% cash but I'll need to look into it more. Ive got a long way left to go. And a lot to learn.
- Member since 2016 · 143 posts · 157 votes9y
To each his own. Debt makes me horribly uncomfortable. My first house was bought with a mortgage at about 50% LTV. The rest of my properties I saved and paid for. It's slower going but I sleep well and my offers often are accepted over higher offers because it's cash with a 7 day close. I think paying cash for things makes most of fight harder to save every penny. It's a less stressful way of doing things. Good luck to you!
- Investor · Miami, FL · Member since 2016 · 75 posts · 23 votes9y
Dave Ramsey brings an immense of value. Reading his books; it inspired me to pay all bad debt. However, there is good debt and bad debt. His theory of zero debt is because he over leveraged himself which led him to reach a financial crisis. Robert Kiyosaki promotes good debt. Debt is like a gun it could either protect you or you might just end shooting yourself on the foot.
- Real Estate Investor · Marysville, OH · Member since 2014 · 242 posts · 196 votes9y
We followed Dave Ramsey to get out of debt. We were not his typical consumer debt listeners, we didn't have revolving, auto, or student debt of any kind, we only had real estate (heh, I should have known back then!) debt but it was not income producing real estate, it was personal home real estate and land for future home building debt.
We did pay everything off and became debt free. It was an amazing feeling. In fact, later we fell off the DR wagon and financed a larger, more expensive personal home and it was a disaster... A money pit in so many ways, and brought so much stress into our life. When we moved, we bought our very nice home with cash. We have since decided that for us, free & clear is the way we like to be on our personal assets.
But we do use leverage in investing. We're conservative though, and not doing low money down ultra-max leverage deals. We put good 20% or 25% down payments on the units, and buy them under valued, and only buy cash flowing property. Basically, buy properties with a large "margin of safety" as Ben Graham / Warren Buffet would say. So even if the market goes way down, we wouldn't have to worry too much. I considered doing 100% cash deals, but I didn't feel good about taking all the money I had in savings / investments and putting it into a handful of properties, whereas I can put a portion of that into more properties, have someone else pay the balance down for me, and still have a lot leftover as backup funds. Your mileage and situation will vary.
- Investor · Chandler, AZ · Member since 2015 · 409 posts · 214 votes9y
I like the idea but I had to change it up for my circumstances
being debt free is great- but to be a millionaire you have to have a million of debt- debt creates wealth as long as that wealth is controllable and sustainable
high rewards are high risk
learning the principles of the 6 dollar latte gives you a view of how fast you can separate yourself from your money
one thing schools don't teach our children- what is money and how to use it- or else all people would be equal in the use and terms of capital-interesting huh?
enjoy
- Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes9y
Originally posted by @Steve Vaughan:
I followed Dave's debt snowball plan and baby steps to get out of consumer debt ($87k), but don't pay all cash for rentals.
Dave was burned by callable real estate mortgage notes back in the 80's. The long-term fixed products we use today wouldn't have been able to bk him like those did.
I use intelligent leverage for RE and try to stay at or below 80% to avoid PMI. I am accelerating commercial mortgages because they are higher risk (adjustable and callable), but for long-term, fixed residential mortgages with strong down payments I would and do use those @Cody Brown.
Steve's analogy is excellent. And Dave Ramsey is excellent for people who can't really manage money. It's kinda like me & dieting - I can't eat donuts in moderation. So I should follow the 100% no-donut plan. But that doesn't mean everyone has to do that.
So for those of us who CAN manage our money...
Let's say I have $100K to invest.
1) I buy a $100,000 property. Rent it for $1400/mo. Pay taxes, insurance, mgmt fee, repair reserve of around $600/mo. I clear $800/mo. Five years later, I've cleared $800/mo x 12 months x 5 years = $48,000 in cash flow. The market has also appreciated 20%, so the house is now worth $120K. My total return on my $100K is $68K over 5 years, or about 13% per year. Beats the hell out of a savings account. Beats the stock market most of the time, too.
OR
2) I buy 5 $100,000 properties, each with 20% down. I use a portfolio lender that'll only do 15-year notes, so my payment on each house would be about $640/mo each. The taxes, insurance, repair reserve etc. remain the same at $600/mo, so I'm really only clearing $160/mo on each property.
But $160 x 5 properties x 12 months x 5 years still = $48,000 in cash flow. Cool.
But also during that time, I've received that 20% appreciation x 5 properties. So $100K in equity from appreciation. Even cooler.
AND, during that time, the rent has been paying my mortage. The balance on each house is now $60,318, so another $19,682 in equity x 5 properties = $98,410.
In this case, my total return on my $100K is $246,410 over five years, and that really kicks ***.
Obviously, these are pro forma numbers and real world may vary. But I'd much rather have leverage working for me than against me.
- Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes9yI'm a firm believer that if you don't use leverage in real estate then you might as well invest in the stock market. Think about cap rates these days....if you find a 10% cap (which is really good!) and pay all cash, then your cash flow returns are....10%. An index fund might return 7%-9% with less headaches. Now, if you buy that 10 cap with leverage, you might get a cash on cash return of let's say 15%-20%. And you also get your debt paid down by your tenants. And you get to write off mortgage interest. The biggest one is appreciation. Let's say you buy a 100k property in cash and it appreciates 5k. Yay, a 5% return on your cash! But wait, if you put 20% down, plus 5k closing costs (25k total in the deal), and the same property appreciates 5k, that's a 5k/25k=20% return on appreciation alone! Put it another way: if I told you I would loan you money at 5% for you to put into an investment that will return 10%, how much would you borrow from me? Zero? Or as much as you could? Bottom line is one of the biggest factors that make real estate a good investment is the ability to use leverage. If you don't use it then you are ignoring one of the best tools at your disposal.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
My clients on commercial put millions to tens of millions in debt on a purchase. It's done all the time. The question is how much LTV do you want?
I like longer term fixed debt 7 to 10 years in commercial with a 25 to 30 year amort.
Some choose full recourse, some partial recourse, some all non-recourse.
I like real estate debt because if you buy right it is POSITIVE debt helping to generate wealth.
Dave Ramsey and all of those other types are teaching people how to get out of bad debt ( costs them money). They make money selling information. You have to take what they say with a grain of salt.
I will weigh everything I read and learn and choose to implement some, all , or none of it. I live with the results from investing my cash.
- Rental Property Investor · Clark Fork, ID · Member since 2017 · 30 posts · 14 votes9y9 years or so ago my wife and I were qualified for bankruptcy. If it wasn't for finding the Dave Ramsey program we would have lost everything. However, shortly after we found Robert Kirosaki's books. Between finding them both at the right times, and God we now have 6 renters and am in the market for our first multi family property. If you've gone through the Dave Ramsey's program and are interested in real estate. I highly recommend making your next read Robert Kirosaki's book Rich Dad Poor Dad. It has completely transformed our lives.
- Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes9y
@Cody Brown the proof of the pudding is in the eating. whose wealthier Ramsey or Kiosaki? hint: its not Ramsey. Kiosaki uses leverage. I use leverage. I started at age 55. I am currently 62. currently have 8 units and am buying number 9 as I write this. I have 1.4 m in real estate and my total leverage after 2 cash out re-fi's since November is 41% leveraged, including my primary residence and my car loan.
I am over cautious and I know I am missing opportunity I have a car loan and include that as a real estate loan because after the car was paid off I re financed it and used the money for a down payment on a duplex. where else can I get 30K @ 2.0%?
RR
- Investor · Chattanooga, TN · Member since 2016 · 146 posts · 108 votes9y
Leverage is a tool it is neither good or bad, it all depends on how and when it is used. Having paid off properties will provide higher cashflow per unit but what is your return on equity? I think anytime return on equity falls below 8% it really is time to asses whether it is the best use of the money. Take this example:
Purchase a house for 100K cash with 10% cap rate. 10 years later the house has appreciated 3% per year for a total of 30%. Now the house is providing a 7.7% return on equity, at this point you would be better off with an index fund and have no headaches.
- Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes9y
I "own" $2 million in real estate. However my equity is only 25% of that. I also cashflow $12k a month after all PITI and expenses.
Does the fact that I'm bringing in a profit of 12k a month overpower me being $1.5 million "in debt"? you bet!
Think about that scenario for yourself and then you can decide whether you will let fear or success drive you. - Investor · Somerset, KY · Member since 2016 · 4 posts · 3 votes9y
My wife and I follow Ramsey's every dollar program (cash in envelopes every paycheck) for PERSONAL income and debt / life. Our business does not follow his model as it would take a very long time to save up to that point and by then...i'll retire! We leverage all we can in the business side, but keep all its expenses & income settled there. We do not draw from it, live off it, or use it for any reason other than the business. But, again, we do strictly follow it in our personal finances. It was actually the tool that made us financially responsible to be able to move into the rental business.
- Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes9y
Dave Ramsey's teachings are very valuable for folks who don't know how to handle money. Unfortunately, that's probably 95-98% of everyone. For the rest of us, there are some good pieces and parts to it, but if you are smart and do it right, using OPM is a critical way to build a real estate portfolio. Had I followed Dave Ramsey's teachings on buying rental property, I'd have 2 units and a 1/3 of the cash flow and half the equity. So it doesn't work for me. Again Dave Ramsey, Suze Orman, and folks like that are mainly for people who have a W-2 income, need to work for 40+ years before retiring, and follow the traditional "Go to school, get a job, work until 65, then retire with what you've been able to save" path. Like I said, that's the VAST majority of people (probably at least 95%). The other 5% of us use a combination of their teachings and others and formulate our own plan.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
@Linda S. if you have a personal mortgage and student loan, you are by no stretch debt free. In fact you have the two largest personal debt loads that an individual can have. I am sure you are doing better than many of your friends, but don't fool yourself into thinking you you meet the definition of debt free. Student debt is actually the worst kind of debt because it is permanent debt, meaning even if you file bankruptcy then you still have the debt.
The only good debit is income producing debt, so yes I am on board with financing rental properties. Everything else should be paid off.
- Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes9y
@Joe Splitrock, I just got my masters in finance in 2015 (undergrad paid off), and bought my first house in 2015... and since then have bought multiple duplexes and SFHs in cash.. so yeah.... I agree, definitely not debt free now, as I'm in a very aggressive investing mode. Heck, I could knock 50% off my student loan right now... or I could buy another house-- guess who is looking at houses now? :)
- Real Estate Agent · Houston, TX · Member since 2017 · 117 posts · 34 votes9y
Originally posted by @Account Closed:
We followed Dave Ramsey to get out of debt. We were not his typical consumer debt listeners, we didn't have revolving, auto, or student debt of any kind, we only had real estate (heh, I should have known back then!) debt but it was not income producing real estate, it was personal home real estate and land for future home building debt.
We did pay everything off and became debt free. It was an amazing feeling. In fact, later we fell off the DR wagon and financed a larger, more expensive personal home and it was a disaster... A money pit in so many ways, and brought so much stress into our life. When we moved, we bought our very nice home with cash. We have since decided that for us, free & clear is the way we like to be on our personal assets.
But we do use leverage in investing. We're conservative though, and not doing low money down ultra-max leverage deals. We put good 20% or 25% down payments on the units, and buy them under valued, and only buy cash flowing property. Basically, buy properties with a large "margin of safety" as Ben Graham / Warren Buffet would say. So even if the market goes way down, we wouldn't have to worry too much. I considered doing 100% cash deals, but I didn't feel good about taking all the money I had in savings / investments and putting it into a handful of properties, whereas I can put a portion of that into more properties, have someone else pay the balance down for me, and still have a lot leftover as backup funds. Your mileage and situation will vary.
I'd like to take this approach for me and my lady!
- 3yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
Quote from @Cody Brown:
Hey, guys!
So I was wondering if any of you follow Dave Ramsey and what you think about his advice on buying real estate? For those of you who don't know, Dave Ramsey suggests a zero debt, 100% down policy for practically everything. He advises not to buy a rental property until you can completely afford it in cash.
I was wondering, how feasible is this? Is it a good strategy? If you have done this before, what are the pros and cons and would you suggest doing things this way?
Thanks!
My wife and I used the Ramsey debit snowball to pay off $160K of student loans, credit card and other payments in 2 years. After that we use that as the beginner stage of getting focused and finically savvy then went to the next level which is Robert Kiyosaki to build generational wealth a little faster.
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