Can Rich Dad Poor Dad beat up Dave Ramsey?
Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes
Can Rich Dad Poor Dad beat up Dave Ramsey?
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Real Estate Agent · Tampa, FL · Member since 2009 · 456 posts · 123 votes
11yTo me this whole 'debt' concept of a mortgage on rental property is utter nonsense. If you are paying 500 for a mortgage, 400 for taxes insurance water etc, and renting it for 2000, you are not in some risky position to suddenly get f-ed. Lost your job? Uhhh who cares, you aren't paying the mortgage - the tenant is! You're still clearing 1100/month. Even after operational expenses you are cash flowing. You will actually be BETTER OFF than if you did not have the income property and lost your job because guess what - then you have 1100/month coming in vs zero.
I don't even care about appreciation I care about cash flow. Oh God, what happens if I buy a house for 300k and it drops to 200k? What am I going to do? How about not even give a damn because the rents don't drop in sync with the sales prices! In fact rents continued to rise strongly through this whole recession! If you are buying and holding then price fluctuations after you buy are largely irrelevant.
Most people don't have hundreds of thousands of dollars lying around to just scoop up a few properties without financing. And even if you do, you're leaving a big chunk of profit on the table. I'll make a simple example based on a property I am considering buying.
List price 100k, 2 family, rents for 1800, expenses 1200/month including ~400 for a 30 yr fixed mortgage in the low 4s. That's 600 profit a month.
Now, to finance, you'd need 25% down. That's 25k. Plus 4k closing costs. (I don't have to escrow and can count IRA funds for the 'reserve' they want to see. If your bank doesn't give you those options, get a better bank.)
So, you'll make 600 x 12 = 7200 profit yearly. That's a 25% return on your money. And that's before we even look at the mortgage interest deduction and depreciation! Please show me a better investment!
But if you bought it with cash, it becomes 1000 profit a month (since you're no longer paying the 400 mortgage payment) so it becomes 12000 profit yearly. That's only a 12% return on your 104k of cash. LESS THAN HALF COMPARED TO USING FINANCING, FOLKS. If you want to make less than half as much profit, be my guest I suppose... And you don't get the mortgage interest deduction...
If you had 100k cash, you could buy 3 of these properties with loans (29k for DP + CC each) and still have 13k left over to stick in your rainy day / sudden repairs fund. Then you would be making 600x3 = 1800 a month profit, which is 21,600/month, from 87k cash invested, which is again 25% return annually, before we even look at the mortgage interest and depreciation factors.
So do you want to make 12% or 25% for doing the exact same amount of work...
I'm not a financial advisor, use your own best judgment.
151 Replies
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes11y
In an appreciating market Kiyosaki leverage theories are usually best.
In a depreciating market Ramseys debt-free theories are usually best.
The long term problem with Kiyosaki is that without an exit strategy, in a cyclical market, you will always encounter what is traditionally called "gamblers ruin". A lot of people on this forum are going to find that out the hard way, as many did in 2008.
- 11yJohn PowellPro MemberReal Estate Agent · Kennesaw, GA · Member since 2015 · 308 posts · 153 votes
Great topic I'm a student of both camps. I live with no debit except mortgages. This allows me the freedom to have enough disposable cash from my day job to cash-flow what my rental house cannot. Its on a 15 year mortgage was my primary and it breaks even. even if the house is vacant I can cash flow it from my day job. I'm really on the fence right now i'd like to expand but that would be going beyond the limits of what my income alone can support so I would have to have a cash-flowing property. I think that there is no question that eliminating any not real estate debt is the way to go because it gives financial freedom
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Can't argue with no debt... as we all get older we finally realize that.
- Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes11y
I have heard the you should never have debt on a depreciating asset or on a liability. I have had debt and now I'm working to wipe it out. I will also own my home out right in less than 5 years. Now the question though lies on rentals. How do you protect yourself without limiting yourself?
- Huntsville, AL · Member since 2015 · 17 posts · 19 votes11yIf you're young enough I would go the debt free route. I actually looked at this scenario recently because of credit issues and being self employed. To me it seems to be a safer secure route to take for someone who doesn't have a traditional day job.
- Columbia, SC · Member since 2015 · 7 posts · 1 vote11y
This is a great question. I've also been asking myself the same thing.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes11y
I like the less debt the better, down to about 50/50 on appreciating assets only. As I've grown and aged like @Jay Hinrichs :) (tho I'm in the buy and hold arena) I'm ok with large equity positions in properties and not scrambling to maximize every dollar or every return. Too stressful. Banks can suck it- I am not taking out more equity lines. I like 15-yr mortgages and their corresponding lower rates. A combination of both DR and RK. Never finance things that go down in value, like cars or lattes. Brew your own coffee and buy a beater. Save the car payment, move up, save up, move up. Try and find a balance between the 2 - not too leveraged, not too conservative!
- Capistrano Beach, CA · Member since 2013 · 283 posts · 169 votes11y
Personally, I don't think the decision needs to be mutually exclusive between debt and debt free. There is quite a lot of difference being 100K in debt and 10m in debt. How the debt is structured, the terms etc makes a ton of difference. I know you're trying to find a simply answer, but I think that why this question of debt and no debt can never really be answered.
For myself, I started out with no debt, but found it a real slow way to make money, so I upped the ante to the point where I couldn't sleep at night anymore, then i know I had gone too far, and I scaled back. That's when I realized it's not only being comfortable or not with debt but also how much.
The other aspect of debt I've found over the years is that it's like a tool and like any tool, one must use it often in order to get comfortable with it. My first home loan took me months of agonizing, the subsequent ones, not so much as I became more adept to using debt, planning for it etc. In summary, if you're trying to find an answer, it's hard if you've never taken on debt. I would say, try a small loan, see how you feel about it and slowly scale up till you reach the limit of your comfort, then decide if you like it or not.
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes11y
@Matt Cramer as to
"How do you protect yourself without limiting yourself?
the short answer is you cant, you are asking both to have the cake and eat it too. If we knew how long the current upswing in the market would last then we should leverage every asset we have to the hilt - that would maximize our returns. Unfortunately this is the worst thing you can do if you get caught in a downswing.
At the end of the day you have to absorb as much debt as you are comfortable with. This will vary person to person but there are many people who haven't even "stressed tested" their real estate portfolios to even account for a depreciating market.
This is also one area where the much maligned Cleveland cash flow crowd is in a better position than the "real wealth" San Fran equity out crowd: the cash flow folks can likely cover their margin with the rental generated cash flow, if you've equity stripped your San Fran assets to expand your empire you really have no recourse if the APV goes down and you are overextended relative to your cash reserves.
- Real Estate Agent · Tampa, FL · Member since 2009 · 456 posts · 123 votes11y
To me this whole 'debt' concept of a mortgage on rental property is utter nonsense. If you are paying 500 for a mortgage, 400 for taxes insurance water etc, and renting it for 2000, you are not in some risky position to suddenly get f-ed. Lost your job? Uhhh who cares, you aren't paying the mortgage - the tenant is! You're still clearing 1100/month. Even after operational expenses you are cash flowing. You will actually be BETTER OFF than if you did not have the income property and lost your job because guess what - then you have 1100/month coming in vs zero.
I don't even care about appreciation I care about cash flow. Oh God, what happens if I buy a house for 300k and it drops to 200k? What am I going to do? How about not even give a damn because the rents don't drop in sync with the sales prices! In fact rents continued to rise strongly through this whole recession! If you are buying and holding then price fluctuations after you buy are largely irrelevant.
Most people don't have hundreds of thousands of dollars lying around to just scoop up a few properties without financing. And even if you do, you're leaving a big chunk of profit on the table. I'll make a simple example based on a property I am considering buying.
List price 100k, 2 family, rents for 1800, expenses 1200/month including ~400 for a 30 yr fixed mortgage in the low 4s. That's 600 profit a month.
Now, to finance, you'd need 25% down. That's 25k. Plus 4k closing costs. (I don't have to escrow and can count IRA funds for the 'reserve' they want to see. If your bank doesn't give you those options, get a better bank.)
So, you'll make 600 x 12 = 7200 profit yearly. That's a 25% return on your money. And that's before we even look at the mortgage interest deduction and depreciation! Please show me a better investment!
But if you bought it with cash, it becomes 1000 profit a month (since you're no longer paying the 400 mortgage payment) so it becomes 12000 profit yearly. That's only a 12% return on your 104k of cash. LESS THAN HALF COMPARED TO USING FINANCING, FOLKS. If you want to make less than half as much profit, be my guest I suppose... And you don't get the mortgage interest deduction...
If you had 100k cash, you could buy 3 of these properties with loans (29k for DP + CC each) and still have 13k left over to stick in your rainy day / sudden repairs fund. Then you would be making 600x3 = 1800 a month profit, which is 21,600/month, from 87k cash invested, which is again 25% return annually, before we even look at the mortgage interest and depreciation factors.
So do you want to make 12% or 25% for doing the exact same amount of work...
I'm not a financial advisor, use your own best judgment.
- Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes11y
The problem isn't that I'm uncomfortable with debt. To me the 12% vs 25% makes total sense buy 3 not 1. However I'm trying to find what the risk here is and how to minimize it. If I have 6 months in reserves for costs on each property I purchase I would feel safe. But does that mean I am safe? I hear of people who losts their rentals during the crash idk if this is because they had mortgages or had a loc but the bank called them due and they lost.
I simply want to avoid going bankrupt because after I start making 5-6k a month cashflow I'm not going to keep working the way I am now. I will stay active as an agent and be more selective on the work I take and probably not make as much (worst case). DO I want my cake and to eat it to? Yea who doesn't. I understand that's not how it works I simply want some insight on other peoples experiences. Did anyone hold their rentals through the crash and come out ahead? I want to build and scale fast so I imagine mortgages will be necessary. I just want to know the best and safest way to play to win.
- Capistrano Beach, CA · Member since 2013 · 283 posts · 169 votes11y
Hey Matt, ok, I'll volunteer, i did have rentals through the crash, I didn't lose it but neither did i come out ahead. After the market crashed I diluted about 50%, made a profit of about $50K, so nothing to write home about. The remaining 50%, I'm still holding on. The thing that I do love about these properties is that they are luxury housing. Probably the worst thing one could be holding onto during a crash, but I've never had a problem renting them out. Why? because at the end of the day, no matter how crappy things get, there will always be someone lusting after a beachfront house, steps away from the water etc. My friends that did more mainstream stuff, have had higher vacancies and a little more insecurity.
I know my investing is extremely counter to everything that is preached here, but it works for me because it's a market I kind of understand.
So I guess what is one way to be safe? besides making sure the numbers work, you probably want to keep an eye on the quality and location of the collateral as well. Cash flow in some inner city or small town is all fine and good but god forbid the day the neighborhood should ever turn against you or a major employer moves out of town.
- Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes11y
So then what is the protection that saved you through the bad? Is it the type of property? The amount of equity you held in the properties?
Also what seems to be the biggest risk to your assets, the bank calling them due or the vacancies?
- Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes11y
In a crash I mean. Bank vs vacancies which is a bigger concern?
- Capistrano Beach, CA · Member since 2013 · 283 posts · 169 votes11y
Matt, honestly speaking, I have never heard of a bank calling a loan due unless the borrower did something to trigger it, ie default on a payment etc so that was never really a concern for me.
I've spoken to my banker friends before about this and all of them have said it wouldn't make sense for a bank to call due on a loan that is performing especially not if it a long term loan like a 30 year loan. I am guessing the people you're talking about borrowed on an ARM or a balloon loan, both of which I consider to be tricky debt instruments to use and generally I wouldn't use something like that unless I have checked and verified my exit strategy a hundred times.
For me the biggest concern in a crash was vacancy. I did have reserves to cover it so that help me sleep at night.
I think the thing that kept me safe thus far is they type of loan ie fixed and a high quality asset in high demand. It's this combo that help to hedge my risk. Of course for me the downside is that my cash flow/returns are isn't great, but I'm also doing a capital appreciation play on these pieces or property so if the rent pays costs and principal, I'm a happy camper.
- Real Estate Agent · Tampa, FL · Member since 2009 · 456 posts · 123 votes11y
I don't know WHAT some of you guys are talking about. Make no mistake - during the crash RENT WENT UP. The % of people renting... WENT UP. Where do you think all the people that lost their homes went??? To live on the moon? Come on...
Regarding risk. Provided you are not holding properties in an area with insanely overkill tenant-favoring laws (NYC for example) and you do your numbers correctly, I don't think you have to worry. If you have properties in a normal area with reasonable landlord-tenant laws, and you have to evict someone, it isn't going to bankrupt you. (But in NYC it could take 1 or 2 years to get them out, so yeah in THOSE SELECT AREAS you could have a major problem.) But I absolutely do not suggest investing in those kinds of areas so to me that's an irrelevant concern.
Bank calling the note due because you lost your tenants? I am going to have to call BS on this one. Whoever told you that is lying or misinformed... Please show me the page of a mortgage agreement where it says they can call the loan due for this!
If you do your analysis and numbers correctly before buying, and you aren't basing them on some pipe dream of a rent figure (ie expecting to get 1000 a month for a unit that will really rent for 600) then you are not in some hugely dangerous, risky situation.
Once in a while, you'll have an unexpected repair. Once in a while, you'll have a vacancy for a month or two. But unless you are doing something VERY wrong, you aren't just going to suddenly lose all your tenants and not be able to get new ones for 6 months. That's absolutely insane, and whoever is leading you to believe this is just trying to discourage you.
If you lose a tenant and the place doesn't rent right away, you can hire a broker to help you rent it, lower the rent a small amount, etc - seriously just keep the property in good condition, make sure you don't overpay when you are buying it, and make sure your numbers WORK. There should be plenty of money left over after paying the building's expenses every month, for you to save some toward future repairs and pocket some as profit. If that's not the case, IT'S NOT A GOOD DEAL.
Also, having more units (ie several houses, or a multifamily, etc) spreads your risk around. If you have one SFH worth 500k and it becomes vacant for 2 months, obviously you will feel it more than if you had 5 100k SFH's and 1 of the 5 became vacant for two months... something to consider since you seem risk-conscious. With a good duplex or triplex, you can have a single unit be vacant for a little while and still break even as the other tenant's rent should cover the mortgage, tax, and insurance.
Bottom line is, honestly you have to be careful who you take advice from. A lot of people will try to discourage you from investing or taking risks, and it's usually NOT because they are more well-informed than you. It's either because they are brainwashed into being terrified of debt, or they are jealous of the possibility of you making a ton of money and getting ahead of them in the world. It's sad but it's human nature - read a few books on human evolution and psychology. We are basically wired to try to hold everyone else back and just get a little bit ahead of the pack by any means necessary. When someone steps up, a lot of people in the crowd will try to pull them back. I'm sure you've encountered this in the office too, if you've been working a while.
*I am not a lawyer or financial advisor etc, obviously these are just my opinions and you need to make your own decisions.*
- Developer · New York City & L.I. · Member since 2013 · 79 posts · 29 votes11yI held on to all of my single-family homes through the crash, and about 7/8 of them I had purchased before the crash. My properties are in Long island New York, which is about 15 miles east of NYC so values have always tended to stay high, as well as rents being on the top end Yes the value of the properties did fluctuate, but the rents stayed exactly the same and of course now are even higher
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes11y
Kiyosaki wrote a book of pure fiction and and now lends his brand to scammer gurus. So take his advice for what thats worth. Ramsey seems far more genuine and if you listen to him for awhile about 95% of what he says makes total sense. I am not a fan of his evangelical bent but he mostly tones that down for the mainstream audience. The 5% he is wrong about IMHO is the absolutely zero debt and the over reliance on "growth stock mutual funds" as the best investments. However, face it. Most Americans do not know how to responsibly handle debt. They do not understand the risk they are taking (nor did the best and brightest bankers either!) and I see that clearly amongst many posters on BP as well.
Leverage can be a useful tool but it brings risk. If you try to understand and manage the risk, thats probably okay. If you leverage every last penny 4X and buy properties without adequate reserves, you will lose eventually. Everyone can decide their own level of risk. It depends on how high your income is, your age, your personality etc. But knowing risk and consciously managing and mitigating it is different than simply borrowing as much as you can as fast as you can and count on nothing going wrong.
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Corey Demuth:
To me this whole 'debt' concept of a mortgage on rental property is utter nonsense. If you are paying 500 for a mortgage, 400 for taxes insurance water etc, and renting it for 2000, you are not in some risky position to suddenly get f-ed. Lost your job? Uhhh who cares, you aren't paying the mortgage - the tenant is! You're still clearing 1100/month. Even after operational expenses you are cash flowing. You will actually be BETTER OFF than if you did not have the income property and lost your job because guess what - then you have 1100/month coming in vs zero.
I don't even care about appreciation I care about cash flow. Oh God, what happens if I buy a house for 300k and it drops to 200k? What am I going to do? How about not even give a damn because the rents don't drop in sync with the sales prices! In fact rents continued to rise strongly through this whole recession! If you are buying and holding then price fluctuations after you buy are largely irrelevant.
Most people don't have hundreds of thousands of dollars lying around to just scoop up a few properties without financing. And even if you do, you're leaving a big chunk of profit on the table. I'll make a simple example based on a property I am considering buying.
List price 100k, 2 family, rents for 1800, expenses 1200/month including ~400 for a 30 yr fixed mortgage in the low 4s. That's 600 profit a month.
Now, to finance, you'd need 25% down. That's 25k. Plus 4k closing costs. (I don't have to escrow and can count IRA funds for the 'reserve' they want to see. If your bank doesn't give you those options, get a better bank.)
So, you'll make 600 x 12 = 7200 profit yearly. That's a 25% return on your money. And that's before we even look at the mortgage interest deduction and depreciation! Please show me a better investment!
But if you bought it with cash, it becomes 1000 profit a month (since you're no longer paying the 400 mortgage payment) so it becomes 12000 profit yearly. That's only a 12% return on your 104k of cash. LESS THAN HALF COMPARED TO USING FINANCING, FOLKS. If you want to make less than half as much profit, be my guest I suppose... And you don't get the mortgage interest deduction...
If you had 100k cash, you could buy 3 of these properties with loans (29k for DP + CC each) and still have 13k left over to stick in your rainy day / sudden repairs fund. Then you would be making 600x3 = 1800 a month profit, which is 21,600/month, from 87k cash invested, which is again 25% return annually, before we even look at the mortgage interest and depreciation factors.
So do you want to make 12% or 25% for doing the exact same amount of work...
I'm not a financial advisor, use your own best judgment.
My thoughts exactly. I have over 2 million in loans on my properties and love every minute of it. The doom and gloomers claim debt will drag you down when the market turns, but I know many investors with a lot of debt who did just fine through the housing crisis. The trick is cash flow and reserves. The guys who go bani rupt have neither.
I also Don't care where my debt is. Depreciating asset or not, its still debt used to buy more houses. I care about the rates compared to my returns.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Well your correct in certain markets during the crash other markets the crash was total both prices and rents.. and vacancies skyrocket and investors lost their once cash flowing properties because they lost their renters....
Where this happened
1. Phoenix 4 plexs that once sold for 300k and generated 2400 in rent were 3/4 empty as they were inhabited by mainly construction type workers during the building boom.. those properties fell all the way to 60 to 80k for the exact same property I know many many investors from the Bay Area who bought those and lost them... and their credit to boot.
2. Vegas same thing.. especially in Apartments...
those are just two markets... Folks that leveraged SFR's for rentals lost them in droves as well all through out the mid west and deep south...
So it could be your experience was that rents did not fall. but it was not the same throughout the country.. Here in Portlandia our rents stayed firm and eventually rose as well and values dropped .. apartments that sold at 5 caps got up to 7 and 8 they are right back down to 5 now.... etc etc.
There is no arguing that those that paid cash and owned assets out right were the one's who can weather any market conditions. lest they lose the asset to non payment of property tax's
- Investor · Shawnee Mission, KS · Member since 2015 · 423 posts · 114 votes11ySuch an interesting discussion. By the way, about mortgages. I have 30 years fixed for a rental duplex with current low rent. Should I try to pay it off earlier and save some money on interest (which is pretty low right now) or I would better reinvest money into another rentals (which looks more reasonable but means increasing leverage) I am comfortable at 70% leverage as my target in Johnson county, KS, which is pretty stable appreciating area.
- Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes11y
My goal is to pickup flips at 70% after repair value or better. Put 20% down and hold them as sfr rentals. That way I only have 50% or less financed with a minimum 6 months of reserves that I will build up to 24 months reserves per house. That seems to be the current status of criteria and who knows if that will change: does it sound like a good plan? Planning on buying 50-125k sfr's.
- Contractor · Round Rock, TX · Member since 2013 · 767 posts · 389 votes11y
If you listen to Dave Ramsey. Most of his ragging on debt is credit card or other consumer debt. Or crazy student loans. I've heard several people call in and talk to him that have debt on real estate and are doing it wisely and he doesn't beat them up. DR's net worth is around $55 million and Kiyosaki is $80 million. Both are very successful obviously so there is something to be learned from both men. I'm sure both are better off than almost everybody on this site. I have talked to some of Kyosaki's flying monkey's trying to get me to get into his program and I have found them to be obnoxious and rude. I have called on 2 of Dave ELP's and didn't find them to be particularly helpful, especially the investment person.
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Jay Hinrichs:
Well your correct in certain markets during the crash other markets the crash was total both prices and rents.. and vacancies skyrocket and investors lost their once cash flowing properties because they lost their renters....
Where this happened
1. Phoenix 4 plexs that once sold for 300k and generated 2400 in rent were 3/4 empty as they were inhabited by mainly construction type workers during the building boom.. those properties fell all the way to 60 to 80k for the exact same property I know many many investors from the Bay Area who bought those and lost them... and their credit to boot.
2. Vegas same thing.. especially in Apartments...
those are just two markets... Folks that leveraged SFR's for rentals lost them in droves as well all through out the mid west and deep south...
So it could be your experience was that rents did not fall. but it was not the same throughout the country.. Here in Portlandia our rents stayed firm and eventually rose as well and values dropped .. apartments that sold at 5 caps got up to 7 and 8 they are right back down to 5 now.... etc etc.
There is no arguing that those that paid cash and owned assets out right were the one's who can weather any market conditions. lest they lose the asset to non payment of property tax's
And some would say buying a 300k property that rents for 2400 a month is asking for problems.
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