Otsego, MI · Member since 2015 · 20 posts · 5 votes
So in his book "Complete Guide to Money", he says that you shouldn't even get into real estate investing until you're out of debt, maxed out your 401k and Roth IRA options, have paid off your own house, already have enough wealth built up and can pay cash for the properties. But can that be right?! I mean if so then what? You shouldn't get into real estate investing until you're old and retired? And already wealthy? That blows my whole plan apart! I was planning on renting out my house and then use the equity to put down on a second property and so on. Is that not good to do? I hope someone can shed some light on using debt to build wealth.
DR's advice is excellent for most people because most people are not interested in the work it takes to achieve financial success in real estate investing. BP members are different...and have that interest.
If we all waited for that, we would be waiting for a long time possibly never investing in Real Estate!
I'd say start where you are and realize that anything worth doing AND doing well in life will require a lot of discipline including and most importantly getting out of consumer debt.
@Collin Vosburgh Dave’s target audience is people who are in real bad financial shape and in desperate need of a wake up call. I actually wrote a blog post on how I think Dave is way wrong here. For people just starting their financial journey he’s a great resource but at some point, once you’re in in a good spot it’s time to move away from his strategies and into something a little more sophisticated. BP is great for this!
Keep it all in perspective. Dave Ramsey had a multi-million dollar real estate portfolio by the age of 26 and then his loans were called. He explains it as one bank merging with another, but there is probably more to the story. Consider at the time in the 1980's that the savings and loan crisis was happening. Many of the 1000+ banks that failed were into real estate lending. Although I have not heard him mention the crisis, it is likely he got caught up in a bad time of history.
From that experience, he went on to become very frugal, save cash and eventually got back into rental properties. Dave Ramsey owns hundred, if not thousands, of single family homes now. He claims to have paid cash for all of them. So if someone wants to believe you can't scale paying cash, obviously that isn't true. Plenty of people have become millionaires and even billionaires without taking on debt.
Some may argue that what happened to Dave in the 1980's is a freak situation, but during the great recession there were many real estate investors who lost everything. They were all over-leveraged. As the saying goes, 100% of all foreclosures are on houses with loans.
The idea that someone is immune to this simply because they are a member of BiggerPockets is kind of strange. I guarantee you have all read comments made on the forums by a person who will one day lose everything in real estate investments. And if asked, everyone of us will say "not me". Nobody plans to lose everything.
Also keep in mind the only people on the forums are real estate investors or people who want to be investors. The people who lost everything in real estate are not hanging around the BP forums. See my point? Survivorship bias is at play here.
Leverage = Risk
On the spectrum of risk, a property owned in cash is lowest risk and one that is 100% leveraged is highest risk. Argue leverage (or risk) is good or bad all day. Dave Ramsey is a low risk approach.
Higher the Risk Higher the Reward
Taking on more leverage can help you scale faster. In real estate, you can acquire wealth very quickly using leverage. It is much faster than saving up cash, but also at a higher risk.
Bottom Line
Dave Ramsey is a smart financial guru and successful real estate investor. His strategies to hold a budget and pay down debt would benefit most people. Would you all rather he offered a $40K coaching program to wealth in real estate through leverage? Don't fault the guy for trying to help people.
Just because you listen to Dave Ramsey doesn't mean you need to do everything he tells you. Just because you disagree with some of what he says, doesn't mean all his advice is bad.
My suggestion is take input and ideas from many sources. Merge it all together into an approach that works for you. Be aware of risk level and find a balance that works for your situation.
@Fred Cannon When you calculate that 8% cash flow, are you calculating the $ amount paid by the renter or are you deducting monthly expenses like maintenance fee, property manager, property taxes and insurance, etc.?
@Collin Vosburgh As has been stated in this thread, Dave Ramsey when through a trauma when he went bankrupt that cost him everything financially and that almost cost him his marriage. He reacted to the trauma by saying debt it evil. Imaging that your house catches on fire and burns everything you have and kills your family. You then may look at fire as evil too. But we both know that fire is helpful as long as it is controlled. Out of control fire is very dangerous. Similarly, controlled and strategic debt can be very helpful. While out of control and non-strategic debt can be devastating.
I followed the Dave Ramsey philosophy right after I purchased my first investment home in 2010 and I focused on living below my means and getting out of debt. I didn't invest again until the end of 2014 and I so regret now not diving into real estate as much as I could have back in 2011 - 2014. Since the end of 2014, I have accumulated nearly 100 cash flowing properties/units along with a partner. Nearly all of them have debt financing. I would not have been able to get more than 1 or 2 had I not have used debt to finance my properties. My portfolio is leveraged about 65% and my tenants are all paying down the mortgages on my properties.
Debt financing for assest acquisitions that put money in your pocket is smart debt. Debt financing for liabilities that take money out of your pocket is dumb debt. The lesson here is don't be dumb. Be strategic in the use of debt.