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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James Stevens
Contractor · Temple, TX · Member since 2014 · 379 posts · 164 votes
11y
@Tom Webber That's an excellent example about Apple. It show's the power of using OPM.
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Gordon Weakliem
Denver, CO · Member since 2015 · 16 posts · 4 votes
11y
Originally posted by @Account Closed:

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.
I don't listen to his show but I've been through his money management course. Anish posted what I was going to say - his target market is people who are not good with money. That's why they're reading his books and taking his courses - they're in financial trouble and they got there through debt and through being unsophisticated about money. If someone goes from credit card debt worth 6 months of income to having only a mortgage payment, that's a huge improvement in their financial position. But you're still an employee and still dependent on someone else for your income.
Anish's other point about Trump is important - you run your business like a business. Debt is one tool and like any tool it has its downsides. You can cut your hand off with a chainsaw, but it's a great way to cut down a tree. You can blow yourself up with debt, but leverage is a great tool. Educate yourself on the financial side, though. Using a cocktail napkin as your financial planner is a bad business strategy.
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Trever Whittaker
Lender · Cedar City, UT · Member since 2015 · 3 posts · 0 votes
11y
Even if you pay cash for a house you are still paying interest. What Dave Ramsey never addresses is the opportunity cost when you have all your cash tied up in a few projects. It all depends on how good you are with your money. If you can make better than 4% on your money then it is better to pay the bank their 4% and then use your money to make the 10% most of us are looking for. If instead of investing the extra money, you plan on blowing the money or putting it in a CD, then it is better to pay off the loan. Dave Ramsey assumes that all of his listeners are complete idiots are are going to blow all of their extra moeny on "dodads". Dave is finance 101, hopefully you have moved on to finance 202 or beyond.
There is also a difference between a mortgage on an investment property and your primary home. If the market goes sour on an investment property, I can walk away with out major bruising. If I loose my primary home, I am in a world of pain. I think paying off your primary residence changes your mindset on what kinds of risk you are willing to take because you know your family will still have a roof over their head.
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James Stevens
Contractor · Temple, TX · Member since 2014 · 379 posts · 164 votes
11y
Originally posted by @Trever Whittaker:

Even if you pay cash for a house you are still paying interest.
That makes absolutely no sense!
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Trever Whittaker
Lender · Cedar City, UT · Member since 2015 · 3 posts · 0 votes
11y
@James Stevens
It is not interest exactly, it changes into opportunity cost. If you pay cash for a house, that means you do not have cash to spend on something else. If you could be earning 10% on a different investment but you have tied all of your money up in a home trying to avoid a mortgage, you are loosing that 10% because you do not want to pay the bank 4%. You are at a net -6% on that money.
On the other hand, if you don't do anything productive with that money and it would just be sitting in a savings account earning .01% then by paying off your mortgage you would be netting +3.99% by paying the mortgage instead of holding it in cash.
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James Stevens
Contractor · Temple, TX · Member since 2014 · 379 posts · 164 votes
11y
@Trever Whittaker I completely understand the idea of missing out on opportunities of investing by having your money tied up. That decreases the ROI and Cash on Cash return. That's just NOT what you said.
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Kurt Kwart
Specialist · Atlantic City, NJ · Member since 2013 · 431 posts · 170 votes
11y
Dave Ramsey went broke on 'subject to' deals and you can find plenty of people here that would encourage that type of deal.
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Jesse Waters
Investor · Aiken, SC · Member since 2014 · 398 posts · 120 votes
11y
Here's my 2 cents worth. I really like DR, he has good advice for the average consumer. But, I think that most of us on BP aren't average. Personal/consumer debt is bad, every dollar you pay in interest is a dollar that you can't invest. Every dollar you leverage in REI is a multiplier.
That being said, to me debt is like dynamite... It can move mountains or blow you to bits in an instant. So, before you assume any debt, lets assume good debt for investing. You should always make sure that even with the most conservative estimates that the numbers work out.
I try to follow DR for my personal finances, pay off the high interest stuff, don't buy what you don't need, live with in your means etc. But, for investing, I take a modified Kiyosaki approach, use OPM, leverage, but I want to make sure it is a sound investment, and as has been pointed out here, I don't believe that I will reach my goals by purchasing all my properties out right in cash, too many advantages not to.
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Eric Taylor
Investor · Mission, TX · Member since 2014 · 117 posts · 40 votes
11y
It is simply about risk tolerance and true ability for REI. The Ramsey method is best for true novices and the risk averse.
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Karl James
Land Investor · Midlothian, TX · Member since 2014 · 93 posts · 43 votes
11y
I am a big Dave Ramsey fan and agree with a great deal of what he teaches. For so many, his approach would do them world's of good. I suspect anyone who has followed his program to get out of debt (including or sans mortgage) has probably, over the course of the journey, developed the financial skills and discernment to make reasonable leveraged real estate investments. When it comes RE investing, I wouldn't condemn someone who does their homework, knows the numbers and takes reasonable risk relative to the potential return. Just remember when you do score big, Dave also promotes exceptional generosity.
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Jason K.
Property Manager · Tacoma, WA · Member since 2014 · 24 posts · 20 votes
11y
I grew up in the same town as Dave and have met him a few times. His headquarters are a couple blocks from my Dad's office. Overall I tend to think his teachings are good for personal finance, but not necessarily investing. When I think about how many people are living paycheck to paycheck and up to their eyeballs in consumer debt, I think "boy America really needs more of DR's teachings"!!! But when you get past that I think people like Robert Kiyosaki have much better teachings about investing.
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Rusty Scott
Real Estate Broker & Investor · Indianapolis, IN · Member since 2012 · 218 posts · 83 votes
11y
You have to fully understand DRs background to understand how he approaches finances today.
He basically teaches how he lived his life after he went bankrupt from real estate debt. He's very clear that he tells people to do what he would and does personally do.
He got wiped out....he was a multi millionaire by age 26 via leveraged RE....then lost everything, went bankrupt, nearly lost his marriage and was borderline suicidal. That impacts anyone...and most here probably wouldn't jump back into debt after that either.
He took a lot of risk...way more than most here do. Now he's gone extreme the other way. Just have to understand that when listening to him. Also, his target audience is not the typical person here
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Rusty Scott
Real Estate Broker & Investor · Indianapolis, IN · Member since 2012 · 218 posts · 83 votes
11y
Originally posted by @Trever Whittaker:

There is also a difference between a mortgage on an investment property and your primary home. If the market goes sour on an investment property, I can walk away with out major bruising. If I loose my primary home, I am in a world of pain. I think paying off your primary residence changes your mindset on what kinds of risk you are willing to take because you know your family will still have a roof over their head.
You do realize that most every loan for at least smaller investors are personally guaranteed? You can't necessarily just walk away if you have other assets or substantial income. Your homestead is probably protected, but not much else.
There are people all over, just now getting recourse lawsuits filed against them from walking away from properties in 08-10.
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Shawn Thom
Investor · McKinney, TX · Member since 2012 · 588 posts · 224 votes
11y
I've been in both places... I've been pretty heavily in debt compared to income and I've been repetitively debt free. I loved DR so much I used to teach his classes at my church. I believe in what he teaches and the Christian aspect of his relation to debt as well. There are many that will take the secular parts of debt free living and not use the Christian references. That is fine, but you won't find the next paragraph too interesting.
Before I got into real estate, I was 21 payments away from having home paid off and being 100% debt free. I felt more and more called to do something different. I had always wanted to do real estate. I felt I had some of the skills and drive to be successful and I had some family members that were willing to help me who were very successful in it. The final straw came when my wife got an inheritance.. Eventually the calling became more deafening. Specifically the parable of the talents (mathew 25:14-30) spoke to me on taking advantage of the opportunities I was given and the using the physical, intellectual and spiritual gifts I was given. I felt like the last servant in the parable and had buried everything in the field. From there I pulled some equity out of my home(still a conservative amount) and took the plunge. Made some mistakes, had some successes, God showed me his favor and I'm still going.
The short answer is that everyone has to make their own minds on debt. I try my best to only use debt when it can make me money and even then I am extremely conservative. So far, so good. I have been successful, love life, try to give often, and share what I know.
PS, for the record I think the parable of the talents is significantly about more than making money.
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Liviu Ciobanu
Ocean City, MD · Member since 2015 · 1 post · 0 votes
11y
I listen to Dave Ramsey show every day. I used his plan to get out of debt now i am debt free )) I just think that to understand DR you just have to listing to him a lot. Now i want to start the RE business and i see how hard is to begin with out the debt(. But this is what DR is telling all the time that to start in real estate is better to begin with something else to pull the money of that business and buy real estate. Is going to be hard for the first houses but after a few of them once in a while the money you get from the rent is buying you other houses. The only problem that this is not a very "sexy" plan.
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Laura L.
Portland, OR · Member since 2014 · 14 posts · 2 votes
11y
I am 110 percent with Cal C. and Dave Fontana!
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Wilson Churchill
Madison Heights, MI · Member since 2014 · 471 posts · 132 votes
11y
As long as you have enough cash reserves, it would be hard to "go broke". Leveraging with no reserves is a liquidity risk.
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
One thing that neither Dave Ramsey nor Robert Kiyosaki ring up is the RELATIVE risk of debt. All dept increases risk, but the risk depends on the amount of debt.
I like Kiyosaki's good debt vs bad debt but he doesn't account for the risk. There is High risk "good debt" and there is low risk "good debt" Debt coverage ratio is a measure of risk of a loan on an income property. Banks will loan at a 1.25% DCR. but I want to borrow at a 1.5 max DCR to reduce my risk.
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Presley Reeves
Investor · Wlmington, NC · Member since 2012 · 62 posts · 19 votes
11y
Tom,
Great topic. I am a little more inclined to go with Robert Kiyosaki'a philosophy about "good debt," and "bad" debt. Good debt is money borrowed to purchase things like rental property that generate income for you, whereas bad debt is something that costs you money each month. A boat, a car, or other such "do-dads." Your personal mortgage is "bad" debt, in a sense, because that is a monthly expense. However one does need a place to live, and you could make an argument that it is better to build equity in your home yourself, as opposed to building equity for a landlord. This is where both Kiyosaki, and Ramsey would agree that a mortgage on a place you live in is "bad debt." You carry your mortgage as liability on you balance sheet; the bank carries your mortgage as an asset on their balance sheet because they collect money from you each month. So when you borrow money for income producing real estate it is not the same debt you have for personal items you buy that cost you money, and depreciate over time. For rental property you carry the debt as a liability, but the property itself as an asset, and your net operating income minus your cost of money is your cash flow, which should be positive. So it should be easy for each of us to answer the question; is all debt the same?
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Kira Golden
Investor · Cabo Rojo, Puerto Rico · Member since 2015 · 95 posts · 53 votes
11y
I have a lot of respect for Ramsey and his view points. In general I think he is a balancing force in our industry. I see too many new investors go broke or leverage their credit cards and children's savings to get into real estate. Despite the founding values of "life liberty and the pursuit of property" (John Locke), owning investment properties is not a right, and not everyone should be doing it. Often times the dream of financial freedom is leveraged to get people to open their wallets and pay for over priced classes or buy investors experienced investors can't sell to anyone else. I think it is a good idea to at least target lower leverage deals and play it more conservatively to start.
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Richard Dunlop
Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
11y
DR was also borrowing money besides what he was able to borrow on mortgages.
(short term notes that the lender called due)

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Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
11y
Originally posted by @Kira Golden:

I have a lot of respect for Ramsey and his view points. In general I think he is a balancing force in our industry. I see too many new investors go broke or leverage their credit cards and children's savings to get into real estate. Despite the founding values of "life liberty and the pursuit of property" (John Locke), owning investment properties is not a right, and not everyone should be doing it. Often times the dream of financial freedom is leveraged to get people to open their wallets and pay for over priced classes or buy investors experienced investors can't sell to anyone else. I think it is a good idea to at least target lower leverage deals and play it more conservatively to start.
Wow John Locke gets mentioned and we are not even talking about Lost!
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Kimberly T.
Investor · Colorado Springs CO · Member since 2014 · 535 posts · 253 votes
11y
Well of course Dave Ramsey says you should not finance real estate, he lost his shorts doing that himself! So he's going to think that since it didn't work for him, it won't work for anyone (the classic one size fits all theory).
I have only listened to him a few times myself, mostly for that reason. He doesn't seem to understand that you can study the market and buy right, and use leverage as a tool rather than as speculation. Leverage is crucial in real estate investing, and many people have used it successfully.
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Kira Golden
Investor · Cabo Rojo, Puerto Rico · Member since 2015 · 95 posts · 53 votes
11y
@Cal C. lol- Didnt even think about that. I don't watch TV.
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Marcus Johnson
Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes
11y
C'mon everyone, let's be realistic about this. Most of us don't have the discipline to pay cash for your investment properties, because it would take a long time to acquire properties. Most of us end up borrowing money, because we are so excited to jump into the property investment market that we're willing to take on enormous risk.
Dave Ramsey's plan if you don't know is that his strategy is to pay cash for your rental properties by saving as much money as you can and living on beans and rice. The first property could take 3-5 years. The second might do the same. So after 10 years you may have 3 properties owned clear and free. The more property you have mortgage free your able to multiply your savings X?. So for example if you have 3 duplex's and after all expenses your clearing $1,500 each month, that's $4,500. $4,500 X 12 months = $54,000. Take that amount plus whatever disposable cash you may have and you can add a fourth mortgage free property. Keep doing this and you could have 10 paid for properties in 20 years easily.
So don't discount Dave's strategy. I just don't believe most people have the patience.
I'm more of an in between type investor, where I put 20% to 25% on my properties with cash reserves for EF's.
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