Dave Ramsey followers and mortgages?

Real Estate Broker · North Liberty, IA · Member since 2014 · 42 posts · 22 votes

Any of you who listen and follow the Ramsey debt snowball school of thought have a conflict with securing an investment with a mortgage outside of your personal home? He says only buy real estate if you can pay cash for it. He says he only pays cash for his and how he is a conservative investor but has many friends who have always gotten way too leveraged and end up broke. My thoughts are to disagree with this because not everyone can pay cash for an investment, and how in the world does he expect anyone to buy a big multifamily deal?? What are your thoughts? Especially those who listen to Dave Ramsey? I agree with most everything else he talks about regarding debt and living frugal and on a budget until you have the ability to live within your means.

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Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

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Think about it. The guy selling the system has CASH from all the people buying his informational products............ : )

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
11y
Think about it. The guy selling the system has CASH from all the people buying his informational products............ : )
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James Stevens
Contractor · Temple, TX · Member since 2014 · 379 posts · 164 votes
11y
I do think that Dave Ramsey has some decent advice and ideas, but when it comes to real estate financing he is unrealistic. I am much more in agreement with Robert Kiyosaki when it comes to "good debt and bad debt."
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Kelly N.
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
11y
Exactly what @James Stevens said- follow Dave for getting out of debt and personal finance, but Robert Kiyosaki for investments.
4 Reply
Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
11y
This has been discussed before many times. I personally believe if you pay off all debt that isn't making you money and you keep adequate reserves available. You'll do fine. BTW when reading Robert Kiyosaki remember his main work Rich Dad Poor Dad, was largely fictional. Not sure if it is a good idea to base your investing ideas on a work of fiction. I'm certain there were many Kiyosaki followers who lost everything in 2007-2009.
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Dave Fontana
Rental Property Investor · Western Carolina · Member since 2010 · 144 posts · 66 votes
11y
I know of Dave, I listen to Dave, I like Dave, I even read Daves books. But i'm no Dave!
Well I am, but i'm not. Lol!!
I think he has the right philosophy, but to play in this space you need to barrow. Its just the way it works. I know some very successful sons, of very successful fathers, that always buy cash because there rent roll is over 1M a month. When I get to that point, or my kids do, Iwill be Daves, Dave. But for now, ill keep sending my hard money lenders a Christmas basket every year.
Good Luck!!
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Chris WoodPro Member
Contractor · Greenwood, IN · Member since 2014 · 200 posts · 33 votes
11y
Love this idea of Dave Ramsey's, that paying cash is the way to go. I agree but I can't do it in my business. I am not there yet. So I am working the baby steps in my personal finance. However I think that it is hard to pay for a house cash right out of the gate (but I am trying). I want to buy one cash but I have done the mortgage thing to. Even with Rich dad poor dad, paying things of is still very important. He paid things off quickly to be able to do what he wanted. So in my opinion, I think over leveraging is the issue. There is multiple facets that could be added to this discussion, but this is just my quick 2 cents! Thanks for bringing this up, I continue to listen to Dave to make sure I try to stay grounded and not over leverage myself.
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Yvon N.Pro Member
Homeowner · Pomfret Center, CT · Member since 2015 · 58 posts · 30 votes
11y
It's a subjective matter, i listened to DR podcast everyday when we were getting rid of our debts but i was not implementing his teachings / plans. But still used his radio program as a support system. A week after i did my debt free scream, alone in my car i started looking for investment podcast dor my education. It didnt help that we were entering an election year and i could not stand his political rant What he teaches works for someone who has cash on hand but not for my ambitious plan of leveraging as much as i possibly can feel comfortable with
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Tom Webber- one of the greatest advantages to RE is leverage, which comes in the form of OPM...
The liberal arts answer is, just as you've pointed out, that most people don't have the capacity to throw cash around. So, Ramsey's approach would preclude 999 people out of 1,000 from even entering the game.
A more mathematically to the point answer would be to underscore that the two most pertinent ways of measuring the ROI on any investment (including RE) are Cash on Cash and Internal Rate of Return (CCR & IRR). While CCR is static and IRR is dynamic, both are first and foremost a function of the investment of cash. In property, having too much cash tied up, simply kills investment returns.
Now - we are not talking about "too much leverage". Also, there are special times and circumstances when cash purchase may be more appropriate. But, on balance, leverage used properly is a magnificent tool in RE!
Hope this helps.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
11y
How do you go from tons of bad debt to having a bunch of cash??
You don't do it by paying cash for everything with investments.
2 people:
One pays all cash for a house back in 2010 for 50,000. Today it is worth 90,000 with a market recovery. Rents for 1,000 a month so after expenses make 6,000 a year.
Off the 50,000 a 12% annual return . Equity now 90,000.
--------------------------------------------------------------------------------------
The second person uses good leverage. They buy 5 houses with 20% down in 2010.
Total mortgage after down payment 200k
Houses now worth 90 apiece.
Equity now 250,000
Each house rents for 1,000 a month. 60,000 a year gross - 30,000 expenses = 30,000
Mortgage at 5% about 1,074 a month = 12,888
30,000 - 12,888 = 17,122 cash flow a year
Off the 50,000 about a 34% annual return.
Now this is a very basic calculation so it is not inclusive of everything. I am not fully awake yet.............. : )
The point I want to make is leverage is GREAT if you buy at the right time in the cycle. It is not so great when you buy at the top and values go underwater. If rents hold you have long term debt and can probably ride out the cycle without selling. If you used short term debt that can get you into trouble buying in the wrong cycle for an asset class.
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Tom Webber
OP
Real Estate Broker · North Liberty, IA · Member since 2014 · 42 posts · 22 votes
11y
So would you plan on financing with a 15 yr loan instead of 30's to save a ton on interest? My thought would be if you plan to hold for that long and have reduced cash flow for that long it makes sense. But does it ever make sense to pay the interest on a 30yr?
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Mehran K.
Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
11y
Like @Joel Owens gave an example for: leverage is where it's at for wealth building. You just need to learn the fundamentals so you can minimize risk at the same time.
I would take a 30 year loan over a 15 year loan any day, especially with the rates being so low. Lower payments = more cash flow at the present time. Also, in the later life of the 30 year loan, you'll be paying down the "fixed" payments (that never change) with inflated dollars that are worth less than they are now. $500 dollars 25 years from now could very well equal $200 or less in current dollars. Someone coined a name for this concept, I just can't remember it :)
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Terrance Brown
Investor · Grand Prairie, TX · Member since 2014 · 60 posts · 4 votes
11y
It is very funny reading this. I am still wondering why are there people thinking RE as DEBT. DR has always said that Debt free is paying off everything but the MORTGAGE. So, if you looking at it that way, you can use the DR method in RE and succeed. You will just have to remember to pay it off as quickly as possible, which is what I would think most investors would want to do anyway. Why would you not pay off all loans so all money is yours and you don't have to give any to a lender?
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James Stevens
Contractor · Temple, TX · Member since 2014 · 379 posts · 164 votes
11y
Originally posted by @Mehran K.:

Like @Joel Owens gave an example for: leverage is where it's at for wealth building. You just need to learn the fundamentals so you can minimize risk at the same time.
I would take a 30 year loan over a 15 year loan any day, especially with the rates being so low. Lower payments = more cash flow at the present time. Also, in the later life of the 30 year loan, you'll be paying down the "fixed" payments (that never change) with inflated dollars that are worth less than they are now. $500 dollars 25 years from now could very well equal $200 or less in current dollars. Someone coined a name for this concept, I just can't remember it :)
Plus, if you want to pay the note off early, you can still do that. But, you don't have to. It gives you options.
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Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
11y
I like Dave Ramsey. But you have to understand who is his audience. They are mostly people with tons of consumer debt, cars they cant afford, living an unsustainable lifestyle. His advice for them is spot on. Long before I heard of Dave I always knew you never pay money you cant afford. I have never had CC debt and wouldn't even buy a car unless I had the cash in the bank. 99% of his listeners have to be explained what interest rate means and are so far from understanding something like ROI or IRR. And most of them have no business buying RE on margin. Even on mortgage debt he is basically correct in that debt represents risks. His conclusion on that is avoid at all costs. A slightly more sophisticated approach is to manage the risk to an acceptable level. That's easier said than done. Ask Donald Trump who went bankrupt also. I do leverage but I am very careful to have enough reserves and income to weather some pretty severe storms. I could still lose money (the risk is real) but it would not wipe me out.
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Mark Freeman
Real Estate Investor · Clovis, CA · Member since 2014 · 195 posts · 194 votes
11y
After listening to the podcast with Grant Cardone (108), I decided I can't listen to Dave Ramsey anymore. (I don't have consumer debt, but found his show entertaining). It seems like Dave is pushing the conserve - pressure to be small- lack - scarcity - fear principles that go with always turning the lights off in the podcast. Grant is pushing us to CREATE which is where my focus is. I'll let someone else get caught up in the beans and rice small talk but I am creating something huge and don't want my focus to be on the small stuff.
6 Reply
John HornerPro Member
Flipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
11y
Originally posted by @Tom Webber:

Any of you who listen and follow the Ramsey debt snowball school of thought have a conflict with securing an investment with a mortgage outside of your personal home?
He says only buy real estate if you can pay cash for it. He says he only pays cash for his and how he is a conservative investor but has many friends who have always gotten way too leveraged and end up broke.
My thoughts are to disagree with this because not everyone can pay cash for an investment, and how in the world does he expect anyone to buy a big multifamily deal??
What are your thoughts? Especially those who listen to Dave Ramsey?
I agree with most everything else he talks about regarding debt and living frugal and on a budget until you have the ability to live within your means.
Our time on earth here is far too short to follow his strategy. Is it more safe, absolutely. Will it get me to my ridiculously high goals of success by the time they put me in the ground, NOT A CHANCE.
4 Reply
Account Closed
Omaha, NE · Member since 2014 · 201 posts · 85 votes
11y
I follow dave's strategy in my personal life. ( personal residence is owned outright) absolutely zero personal debt whatsoever, which means I have to drive a 7 year old truck... im ok with that.
However when we are talking about how we invest in real estate, different story. I like mortgages, loans, etc.. and having only 20-40% equity in a property, keeps the cash on cash return up there. This is a business method, not personal finance...
Im sure Dave Ramsey would still agree with my method.
5 Reply
Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
11y
Originally posted by @Account Closed:

I follow dave's strategy in my personal life. ( personal residence is owned outright) absolutely zero personal debt whatsoever, which means I have to drive a 7 year old truck... im ok with that.
However when we are talking about how we invest in real estate, different story. I like mortgages, loans, etc.. and having only 20-40% equity in a property, keeps the cash on cash return up there. This is a business method, not personal finance...
Im sure Dave Ramsey would still agree with my method.
Actually, he is absolutely against it because he thinks people don't understand and/or handle the risk involved very well.
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Curtis BidwellPro Member
Rental Property Investor · Olympia, WA · Member since 2014 · 777 posts · 744 votes
11y
One measure that is not talked about often is Return On Equity. Remember that every $ not invested is opportunity lost. If I pay cash for a home, I have 100% equity working for pennies on the dollar, giving me a very low ROE. (And, I am a target for a lawsuit because there is lots of equity to take.)
My ideal is to maintain about 75% LTV which gives me adequate cash flow, security if the market dips, a solid ROE along with ROI.
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Rolanda Eldridge
Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes
11y
I'm a DR fan, but balance out my portfolio. Most of my debts are business related(tenants pay). Some properties are free and clear and some have small mortgages. Of course, each plan of action will vary. However, growing a RE business can be difficult without leverage.
2 Reply
Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
11y
A couple of things @Tom Webber: 1) the biggest risk is not taking any risk. This would mean you would never buy a home because of all the potential problems; never investing in the stock market because you might lose money; never leaving a job out of fear of the unknown; the list goes on. In the end you will go I never took enough chances.
Many, if not most highly successful people, Dave Ramsey included, have risked it all and lost it all. This usually teaches them very valuable lessons and creates a certain amount of respect for a potential downside.
Are you an investor or a businessperson? An investor might just invest what cash he has but if you want to grow a business you will need to use the credit markets, unless you have a huge trust fund or something.
You are a young guy. Don't invest like an 80 year old. Take chances now while you have the time and strength to recover if SHTF.
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Tony Gonzalez
Renter · Jersey City, NJ · Member since 2014 · 38 posts · 13 votes
11y
From my personal experience, I think that Dave has great concepts, but not EVERYTHING is practical for all situations.
I used ot be all "All credit is Bad Credit!" and blah blah blah...
Fact of the matter is, I learned that the snowball method is a good methodology, but I don't follow the steps in the exact order he does.
His steps
1 )Set a baby emergency fund of $1K
2) Pay off all debt except mortgage
3) Save 3 to 6 months
4) Invest 15% into Roth IRAs and pre-tax retirement instruments.
5) Fund college fund for kids
6) Pay off Mortgage Early
7) Invest and Give
My Steps?
1) Save $1K for emergency fund. Done
2-3) Save AND pay off debt concurrently. So basically, half of the remainder I have left after bills and such are taken from my income, goes to savings, half goes to debt.
4-5) Like 2% to 3% of my net pay gets put into College savings accts for my kids, and like another 2% percent to retirement. That's happening concurrently (while paying off debt)
6) Don't have a mortgage yet, but I definitely would look to pay it off ASAP. However, based on my calculations, waiting to do cash only purchases, won't make sense when I am doing MF purchases of say like $1-5MM. Based on what I am reading, leverage business and finance law (like being an LLC, corp etc.) and making smart moves with money (reusing money to get properties etc) I'm pretty sure getting out of mortgage debt won't be too difficult
7) Investing , already doing it as part of Steps 4-5. Giving...since day 1.
Summary, he has great ideas, just tweak them to work for your situation.
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
11y
I think this is a good idea generally. Yes you can still use leverage with reasonable caution. Ramsey has seen too many use leverage to finance investments and end up with zero. Using leverage and still having the funds to cover in the bank might be the best option.
At the end of the day all these guys are trying to sell you something. I am not sure I need to go to a seminar to find out I should pay down my credit cards or to learn the difference between good and bad debt. If one does not know this ahead of time they probably should not use leverage.
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Travis Fisher
Investor · Salt Lake City, UT · Member since 2013 · 84 posts · 38 votes
11y
If you look at Dave Ramsey's plan it probably fits about 90% of the population. Most people are not interested in investing in anything more than a 401K and that's fine. For them his plan probably does make the most sense. And honestly I follow most of it pretty close. The only debt I have is my house and I'm about 2 years from paying it off.
But everyone here is right. It doesn't fit very well with an investing mindset. Leverage is what makes RE work.
2 Reply
Larry Turowski
Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
11y
@Tom Webber Now listen to this. Apple carries long term debt. The biggest company in the world with the most money and assets carries debt. Why? Because it makes good business sense for them to do so.
As @Travis Fisher said, Dave Ramsey's advice is probably pretty smart for 90% (or more) of the people. Most people don't know how to handle money. Most people are not investors. Most people are just funding their lifestyles. Serious real estate investors are not most people.
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