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
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Scott L.:
Originally posted by @Mark Ferguson:
Originally posted by @Jay Hinrichs:
I understand what your saying about a 300k property renting for 2400... but I think you saying that from your current perspective which is that of investors that have basically gotten into the game post crash.. these were very acceptable numbers in 2000 to 2005.
1% rule was the norm.. and in many turn key buy and hold scenerios like those were in the day still the norm.
regardless if you bought those at 170k the 2% rule the properties still crashed and the owners would have still lost them...
Its a fact that landlords got killed because of leverage in the melt down ,, In addition you have a whole new crop of investors that basically started 8 to 10 years ago at all time low's in values and have only been working on the rebound.. And form buying at all times lows. did not make you some super smart investor who could find the great buys the market came to you. .what your to be applauded for is realizing this and taking action and buying.
I think buying at 300k with 2400 rent and buying at 170 with 2400 rent is a huge difference! Plus many investors in the 2000's could get 95% or higher financing on their properties making their payments much higher than the 20% down investor of today. Once you add in PMI and higher loan to values we are talking about over $1,000 a month more in mortgage expenses on buying a 300k property at 95% loan to value and a 170k property with 20 % down.
Even with high vacancies you can lower rents a lot to get them occupied.
I think the scenario where investors lose it all is not due to buying with leverage, but the investing criteria they buy with.
1. Are you buying in a crazy market where prices have increased 50% in two years?
2. Are you sacrificing cash flow because prices have gone up so much and are hoping rents will catch up or banking on appreciation?
3. Are you stretching yourself too thin with low cash reserves?
4. Are you managing properties yourself to save money, but don't have the time and are doing a poor job of it?
Couple the above factors with leverage and you are asking for disaster. But if you are able to invest in steadier markets, with cash flow, plenty of reserves and either a PM or time to manage yourself you can use leverage to build up the business.
On a second note, did the high net worth guys you know build their wealth using all cash techniques or did they use debt to build their business and then switch to cash investing once they made it?
Curious how much cash reserves you use... 6 months piti, something else?
Might this be a good blog/article topic?
I would recommend at least 6 months piti plus an emegnecy fund for personal expenses. I personally have much more cash on hand most of the time.
- Flipper · Westminster, SC · Member since 2012 · 10 posts · 1 vote11y
I have read through this whole thread and haven't noticed any discussion about which method affords the best tax savings. Any input in this would be appreciated.
- Investor · Fort Wayne, IN · Member since 2009 · 391 posts · 257 votes11y
When I first saw this post, I thought "oh no, not again."
For the record, I have taught the Ramsey courses at my church and my passion is to help others improve their lives financially.
With that said, I happen to live in a linear cash flow market. Pretty boring really.
I own 93 SFR's and I am about 30% leveraged.
When I work with someone considering investing in rental properties, I always emphasize that the first step is to identify a competent property management company. If you do not find a good property management company, my input is to not purchase.
With that said, I have created a cash vs leverage scenario so investors can choose what works best for them.
I have created this scenario based upon a 1.8% rent ratio. Although an investor might do better, I always like to plan on a worst case scenario and not a best case one.
So here is the analysis:
I am going to make my assumptions that your monthly rent will 1.8% of the purchase price. You might be able to do better but I know that you can do this so all numbers will be based upon this scenario and a 50% expense ratio for: Vacancies, Property management fees, maintenance, taxes, and insurance.
Scenario #1:
Purchase 100K worth of homes with cash: Nets $1800 in monthly rent.
Gross monthly rent: $1800
Minus 50% expenses
Expected Net Operating Income: $900
Annual expected NOI: $10,800
Cap Rate and Cash on Cash return: 10.8%
Total return for cash investment: 10.8%
Scenario #2:
Purchase 400K worth of homes with $7200 in monthly rent utilizing 100K cash down payment and a 300K loan at 4.875% amortized over 15 yrs. (Actual numbers from bank loans)
Gross Monthly rent: $7200
Minus 50% expenses
Expected Net Operating Income: $3600
Monthly Debt Payment: $2353
Expected Monthly cash flow: $1247
Cap Rate is still 10.8%
Cash on cash return is 14.964%
First year principle pay down on the loan: $13,918
Total return on 100K investment for the first year: 28.882%
My input is always to choose the scenario that works for the investor.
- Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes11y
- Developer · Cleveland / Akron, OH · Member since 2008 · 922 posts · 399 votes11y
I always see this topic as a question with no answer.
What makes the most financial sense from a modeling perspective, leverage. Once you leave the textbook you get into all of the other aspects of this discussion. Who are we discussing; what are their goals; what is their risk aversion level; where are they investing; how much experience do they have; what asset type. . . .
Within those questions lies the disconnect. You will have people in both camps and in between, along with a heavy mixture of opinion and fact.
To throw my hat in, I am in the leverage camp for the growth and returns. As I age and grow, this will change. I began with 10% down pre crash. I now put down more, but I monitor my overall equity percentage across the portfolio. If I "feel" that I need a bit more cash flow, the next one may have more down than the minimum. And that is where it starts getting subjective.
Both sides of the argument can be proven through examples, it doesn't make either of them wrong. Do your thing and try to help others with theirs, don't try to prove the other side wrong.
- Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes11y
I am a cash investor. We own 9 rental homes, our business RE, and our own home outright. I'm not against leverage when used wisely, but at this point in our lives it's not for us. There is nothing like the peace of mind that comes from being utterly debt-free.
Those of you who use leverage can, I know, make a higher percentage on your investment than those of us who are cash buyers, but for some of us, that is not the ultimate goal in life. We are quite satisfied with what we do make, and with the security of knowing we can keep it.
But please, can you all stop telling us that you don't pay your mortgage, your tenant does? That's just silly. Your tenant pays you, and then you choose how you will use that money. If you want to be obligated to send some of that rent payment to a mortgage holder every month, that's fine. I, however, do not.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Sylvia B.:
But please, can you all stop telling us that you don't pay your mortgage, your tenant does? That's just silly. Your tenant pays you, and then you choose how you will use that money. If you want to be obligated to send some of that rent payment to a mortgage holder every month, that's fine. I, however, do not.
But my tenants ARE paying the mortgage. Under your plan I would be collecting about $1,700 more a month from the tenants and have my equity tied up. Instead I am about to collect a lump sum of $350,000 that will be paid entirely by the incremental increase in rent just over the last few years. And in just a few years I can repeat. And since I'm only borrowing up to the incremental increase in monthly rent my equity is increasing.
Wouldn't you rather have $350,000 TODAY instead of $1700 a month?
- Investor · Katy, TX · Member since 2015 · 10 posts · 2 votes11y
I believe that both philosophies are crucial to the beginning investor. Rich Dad talks about the power of leverage and how to use debt in your favor. Dave Ramsey talks about getting out of debt. I think Dave Ramsey's philosophies can be applied to bad debt. When one is going to start investing and taking on good debt, it is good not to have a pile of bad debt. I am debt free having loosely followed Ramsey's program for motivation more than anything. Now, I am preparing to take on some debt for RE investment. I feel much more comfortable doing this knowing my personal finances are in order. If nothing else, I sleep better at night and can spend more time thinking about investment opportunities as I am not wasting time worrying and keeping the bill collector away.
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- Philly Burbs, PA · Member since 2015 · 338 posts · 133 votes11y
Originally posted by @Carl C.:
well some simple criteria can determine if they are honorable ?
1. Are they first generation millionaires ?
2. Did they use their own techniques to become wealthy ?
3. Or are they both simply salesman who became wealthy by selling BS to people like us ?
I vote # 3
- 11yGene HackerPro MemberFlipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
In my opinion leverage is a incredibly powerful but dangerous tool. Leverage can make good choice into great outcomes, but it can make bad choice turn in to devastating outcomes.
Leverage in terms of borrowing is pretty easy in today's society. Any box store is more than ready to give out credit to buy stuff you likely don't need. Obviously, buying a bunch of deprecating junk is not a good use of expensive leverage.
Leverage can be the greatest of all tools when used right. My wife (soon to be at the time) and myself borrowed from both of our parents to buy a house. We made up the rest by borrowing 4k from credit cards. We sold it for an $80k profit (after expenses) two years later. Right out of collage with no income, this deal was only possible due to leverage. Sure we could of wholesaled it but the return would have been a fraction of our profits. It was a good deal that with leverage became a great deal.
- St Petersburg, FL · Member since 2014 · 65 posts · 22 votes11y
Most of my debt is student loan debt. I will say that it has provided for a financially rewarding career, but has been a large hindrance. I'm a total newbie when it comes to real estate investing. Having to write a two grand check to Sallie Mae every month has really put my real estate investing on hold. I'm getting it paid down, but having that extra cash would definitely allow me to be more aggressive with investing.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
your correct problem is most investor don't do what you describe.. and they end up statistics.
My high net worth friends and associates got their wealth a variety of ways.. most not in Real estate most taking companies public or selling to a public company..
And the ones that did very well in Real estate did it in CA. and Hawaii in massive equity move ups... not in cash flow. But I am sure many have made it rich with leverage and cash flow.. I have plenty of leverage personally but its all short term .. as I am not a buy and hold guy any more... so at any time I can go to 100% cash within 12 months... and all properties except new home constructions loans are owned out right.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
what happened in phoenix to many is their 4 plexs went totally vacant as it was a double whammy.. economy cratered values cratered and the state kicked out many illegals. There was NO reducing rents to get tenants there were no tenants .. Same with Vegas...
I had a good friend who lost 2 shopping centers in Denver 3 years ago.. he had owned one free and clear sold it for 5 million.. used 2.5 as down strokes bought 2 more at 5 mil each got insurance money for debt.. one of the centers was brand new.. It never got a tenant as the subdivision of 600 homes next to it never got built.. he lost both of them.. and this is a guy that sold his car dealership in Texas for many millions to buy the first center for 5mil cash .. but he is OK today.. because everything else he has is paid for including is winter home in the desert summer home in Bend. etc etc he is retired does not work.. But it was a painful event for him.. he had never lost in RE before ..
so did not really matter if you had debt and did not have lots of reserves you lost your properties... there is a reason you see multi family and other rentals in foreclosure it happens all to frequently .. and to some top players as well but disproportionally to one's with no real experience.
And of course in the context of BP so many buy rentals were they don't live that PM is not possible for them .
- Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes11y
Originally posted by @Account Closed:
Originally posted by @Sylvia B.:
But please, can you all stop telling us that you don't pay your mortgage, your tenant does? That's just silly. Your tenant pays you, and then you choose how you will use that money. If you want to be obligated to send some of that rent payment to a mortgage holder every month, that's fine. I, however, do not.
But my tenants ARE paying the mortgage. Under your plan I would be collecting about $1,700 more a month from the tenants and have my equity tied up. Instead I am about to collect a lump sum of $350,000 that will be paid entirely by the incremental increase in rent just over the last few years. And in just a few years I can repeat. And since I'm only borrowing up to the incremental increase in monthly rent my equity is increasing.
Wouldn't you rather have $350,000 TODAY instead of $1700 a month?
Having a perfectly valid reason to use leverage does not negate the fact that it is you, not your tenant who pays the mortgage. The source of the funds you use to pay a debt does not change the identity of the debtor.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes11y
The answer is NO. I bet Dave Ramsey can beat the crap out of the con artist Rich Dad Poor Dad. This con artist became a multi-millionaire by selling fiction dreams. People should stop buying anything with his name on it.
What's the point of having your cake and can't eat it? Leave that thinking to the pessimists. Not only you want your cake and eat it too, you also want coffee or tea to go with it. Oh, and you want someone to clean it up after you're done enjoying it. :0)
Like investing in real estate, not only you want cash-flow, you also want your properties to appreciate, and that's not all. You want to buy them at a discount too. Then you can do cash-out refinance to pull out most, if not all and sometime more, of your money out of the deals. Rinse and repeat until you have reached your financial FREEDOM.
Sort out properties that you want to keep long-term and potentially pass them down to your kids and accelerate to pay them off. You can design to have 1/2 of your real estate portfolio free & clear and the other 1/2 fully leveraged.
Don't ask anyone here or anywhere else permission to be successful. Success doesn't come to you. You have to go and get it. If the con artist can con his way to becoming a multi-millionaire, we can achieve it too. However, we don't have to con anyone to get there. Just remember that debt is a double edged sword. It can help to cut your way to success, but it can also cut you into despair. Use it with extreme cautious.
Best,
- Real Estate Agent · Dayton, OH · Member since 2015 · 86 posts · 36 votes11y
I do not understand most of the hate toward Rich Dad, poor Dad. Many of the people I have talked to said that it was the book that changed their life. And I know it was certainly what got me into all of this.
Back on topic of carrying debt vs not. i have a lot of bad debt i wish I didn't have. But i would see no problem carrying lots and lots of good debt. I'm just not there yet.
- Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes11y
Originally posted by @Roger Smart:
I do not understand most of the hate toward Rich Dad, poor Dad. Many of the people I have talked to said that it was the book that changed their life. And I know it was certainly what got me into all of this.
Back on topic of carrying debt vs not. i have a lot of bad debt i wish I didn't have. But i would see no problem carrying lots and lots of good debt. I'm just not there yet.
I wouldn't say I hate Robert K. I will say that I think his book led to a lot of people losing a lot of money in 2007-2010. Since I picked up several buy and hold properties and did several flips between 2010 and 2012 I'm sure some of them came from investors who bought into Rich Dad Poor Dad, not knowing it was a work of fiction, then lost everything and ultimately allowed me to make some money. Kind of hard to hate someone who does that for you.
I also know that when the next housing bubble bursts, that a lot of Rich Dad Poor Dad followers will lose everything once again and there will be some great deals available.
Remember reserves are key!
- Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes11y
Over the years I have seen some very sad situations but one that was very troubling was a guy that had at least 75% equity but lost his job and burned through his reserves and ended up losing his high equity properties. There was just no financing available so any sale wouldn't net him enough cash to bail him out of his troubles and eventually time ran out.
6 months reserves isn't squat when a serious recession kicks in. It can take six months to build up a big head of steam. The tenant interest dries up just like turning off a faucet.
Would rather see debt with huge cash reserves than F&C and little cash in the bank.
How do you get there? If you are like me it is with leverage at the start but building equity and cash over time-a long time.
- Philly Burbs, PA · Member since 2015 · 338 posts · 133 votes11y
Both these guys are like comic book characters. Super Hero vs Arch Villain.
Personally I like to use cash. But there have been times I needed a bit more money to make a deal fly. Sure t was more risky, but all business is risk. If there wasn't risk, everyone would do it.
If you want to study economics, read Adam Smith, Veblen, Keynes, and Marx
- Investor · Cedar Rapids, IA · Member since 2013 · 494 posts · 407 votes11y
@Brian Mathews "flying monkeys" love it. I had a similar experience.
RK vs. DR in a pillow fight.... I would have to go with Dave, he seems so competitive.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes11y
I think Dave Ramsey's advice should be followed by about 95% of the population. The few who shouldn't are the investor-minded types that you'll find here on the BP boards. For us, I think debt (good debt that is) is a crucial tool for real estate investment.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes11y
I think Dave Ramsey's advice should be followed by about 95% of the population. The few who shouldn't are the investor-minded types that you'll find here on the BP boards. For us, I think debt (good debt that is) is a crucial tool for real estate investment.
- Investor · Pensacola, FL · Member since 2015 · 23 posts · 2 votes11y
I bought a duplex three years ago and put 20% down I told them i would be living in one side but didn't and turns out they check that stuff (don't lie about this) they gave me only a few options 1. pay off the loan or 2. refinance. luckily i had family eager to take this loan and a higher percentage than the bank was paying them for their savings so i was able to "refinance" without the refinancing cost. at that point i decided to pay off the loan extremely quick ( I still don't know why) now I have lots of equity but no cash so i'm going to have to get an equity loan which will have its own fees and use that for a down payment on other properties. My advice, be careful with buying, and less careful with leveraging. if you buy a property at a good price with good cash flow then don't sweat the mortgage. Just keep enough to cover the unsuspected cost of maintenance. Eventually with enough properties your risk will go down, the chances of all your tenants moving out at once or a bad fire or whatever else could go wrong it wont happen to all your properties at once and the others can float the mortgage till you have the cash flow back.
Best Regards
Justin D Schwartz
- Real Estate Agent · Madison, WI · Member since 2015 · 328 posts · 88 votes11y
The key to life is balance. I do wonder though when I use leveraging if I will know when to stop.
- Investor · Mission, TX · Member since 2014 · 117 posts · 40 votes11y
Originally posted by @Steve B.:
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.
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