Can Rich Dad Poor Dad beat up Dave Ramsey?
Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes
To borrow or not to borrow, debt free is the way to be etc etc etc.
The way I see this is a risk vs reward.
How do you decide though where the risk is to great or the reward to little? How do you decide to purchase a property with a mortgage? What are your safety nets? Do you have to buy x% discount? Put X amount down? What are you doing to stay safe?
I'm trying to decide how to approach this so any insight would help. I don't want to end up broke down the road because I over leveraged myself. But where is that line? How do you know what that line is? What should you consider in deciding where to draw the line?
Is anyone on here a buy and hold investor using all cash? If so why and what have you found to be the result? Was it always that way or did you start with leverage?
Also was the title catchy enough? I'm learning catchy title get read the rest sink to the bottom.
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.
Previous comment....
PS companies with ZERO DEBT: American Express, Apple, Citrix Systems, Amazon, Bed, Bath & Beyond, TRowe Price, Red Hat, AutoDesk, and MasterCard.
Pretty interesting that TWO major companies thats entire philosophy is marketing the use of debt as a tool are debt free (AMEX & Mastercard)...
My comment..
Fyi- I did a quick look at Amex's financials and their 12/31/14 balance sheet is showing $138 billion of liabilities. Amazon had $43 billion in liabilities at 12/31/14. I didn't pull the financials of the others, but it's rare to find publicly traded companies that don't have debt.Matt,
I don't know if you are still following this conversation...but I have to admit...
your title was awesome...you can see that it CERTAINLY caught attention!
(That's your marketing skills at work, most likely :)
There is a LOT of personal philosophy being shared...
and a good amount of personal experience...
and the diversity among it reminds me how AWESOME Real Estate is.
There are SOOOOOOOOOOOOOO many different ways to work and enjoy this craft...
and so many ways to make money.
(I'm going to use an analogy in a moment...
and it reminds me WHY there are aisles and aisles of tools in Home Depot...
7 options of the same type of tool...7 brands and colors and fancy shiny boxes...
thats because each one has it's own unique attributes...
you may like one and I may like another...but they are both there for us to use! )
--And hey...if we overpay for the tool...maybe that's our fault, right?---
But I look at it this way...
Robert Kiyosaki made us (read "me")think differently...
and Dave Ramsay wants us to be more responsible (although I have issues with some of his financial preaching, I do appreciate his message of being responsible)
CK Hwang and ANISH TOLIA said it a few days ago...these concepts should not be mutually exclusive.
There are lessons and benefits to be taken from both.
Debt is a TOOL.
Tools can be used safely.
Tools can also be very dangerous.
(ie: talk to an Emergency Room nurse.
Hundreds of thousands of people get hurt every year with power tools.
People cut their fingers off with circular and table saws!
Why don't we tell people to never ever use a circular saw???
Probably because we know they can be used safely.)
And I feel the same applies to Debt as a Tool.
----My Personal Experience----
Matt, You asked for us to share...so here goes:
I've been hurt by Vacancy in the past.
It was a few years back...one of my first deals.
I was leveraged on a property...
I bought it "right" and fixed it up under budget...
but then it SAT VACANT.
2 units...if I had just 1 unit occupied I could carry...both occupied I was +$1,000/mo!!
But it sat VACANT. For close to a year.
That hurt...especially since I had to service the loan along the way.
What I did was use my cash reserves to carry me until I unloaded it to eventually break even.
***I just hold my cash reserves differently.
I had my reserves in cash value inside life insurance...
so they work for me while they are sitting there...
and they still grow for me while I used them to carry the property.***
But when I reflect on this experience, this is what I ask myself:
"Would I still be holding that property if I had bought it all cash?"
I don't know...
I wouldn't have had to service the loan to the bank...
I may have decided to hold it longer...
But would that have been the best idea?...
The issue with that property was LOCATION LOCATION LOCATION.
Bad bad section of town.
So maybe I learned a bit about using the tool...
I recognized the value of having reserves even while I'm leveraged...
and I have a MUCH BETTER idea of how to build my portfolio now than I did back before this debacle!
And I have other, cash flowing properties, with debt on them,
but I also have healthy reserves that continue to grow while I am adding to them on a regular basis, preparing to acquire more!
To the group:
Excellent debates back and forth...
There are many many successful investors on here!
Keep it up!
Thanks for the insight. I was a little shocked to see the post go this long. So you used debt but you made it out of the bad times based on your cash reserves.
The theme I am picking up is that cash is king, whether you use it to by the property or whether it's used as a backup to your mortgage.
I apologize for asking the obvious, but did you attempt to attract tenants by lowering your rent as your property sat vacant?
Thx
Hey James B.,
That's a fair question. I did lower it. However, what I did was ignore some other info that astute real estate investors don't ignore (maybe ignore is too strong...I just wasn't aware)
Like - other vacancy rates in area.
Like - strong crime & drug presence in area
To go deeper into the details, I did have a tenant in one of the two units for a few months...under market rental price (to your point...lowering the rental price did get me a tenant)...and he was great...but the drugs were so bad in that particular area that he was essentially chased out. He did not want his kids seeing that every single day. I even had spotlights installed to try to prevent...fake cameras...he still broke the lease and found something else.
Essentially, I learned some major lessons...
and reflecting back on it...
even though I had to dip into reserves...I may have held on to it longer if I wasn't servicing debt on it...and, in this case, I don't know if that would have been a wise move either.
So, lesson learned...and stronger and wiser moving forward! :)
Thanks for the honest background info. Many will learn from your, and everybody's input to this thread!
- None of your decisions seemed "easy" or "black and white"- glad you shared so I, and others can learn...
thanks,
Jimmy
Like @Jim P. alluded to, thanks for the "Paul Harvey", or "The Rest of the Story" regarding your experience.
I appreciate your transparency.
I just finished Kiyosaki's latest book, Second Chance. I enjoyed his parable of looking at any situation as a two-sided coin, but realizing that it's actually a three-sided. Remember, there are the two edges, or sides, of the coin, but also there is a different perspective standing on the coin's edge...
I'm trying to look from all three sides of the coin when making decisions.
Awe this discussion reminds me of the fable of "The Tortoise and the Hare". To build thy massive real estate empire by running quickly involves taking on much more risk and as such you may not reach the finish line if Murphy jumps out the woods and hits you in the knee with a sledge hammer. However, crawling to build it slowly will virtually guarantee you still get to the finish line. I say you fast walk it.
I have read many of Dave Ramsey's books and they are excellent sources of information. Dave Ramsey is really all about teaching you how to minimize risk to reach the finish line. Eliminate debt, save, invest, and give back to the community. To be honest the other guy mentioned in the post I don't know and haven't read his books not to mean I won't. Dave Ramsey lays out a life plan to help ensure you reach the finish line and is built on wisdom in part from his own life mistakes as a real estate investor. I can relate to that and see how that can help many people even non real estate folks. What he also tells you and what a lot of investors don't take into account is that there are other risks outside all the math and the real estate equations that you must assess also. Sure you will have multiple tenants vacate and possibly trash the house, the HVAC need replacing, the roof start leaking, toilet or water heater supply hose burst and flood the house, termites infest and swam the house, lightning hit the tree next to the house and blow out windows, neighbor burn down your fence, tree fall on your house, the bank close your line of credit for no apparent reason, insurance company you have used for years drop all your policies at once without ever having filed a claim. All these things have happened to me.
Then there is the outside risk you can't measure. For instance, you or your love ones get diagnosed with cancer or serious illness, become disabled and need 24hr care, get in a car wreck and get sued, the bank closes your lines of credit (yeah I already said this but this really made me mad with a 780 credit score), the market crashes, you get divorced, a riot or hurricane or earth quake or flood wipes out or damages most your properties, and the list goes on and on.
It is called Murphy's Law and it isn't a matter of if but a matter of when it will happen to you and it is usually when some of those other above property issues happen! Life teaches us these lessons.
So that is why we try to minimize all these risk as much as possible. Eliminate the use of debt as much as possible, saving cash reserves, diversification of investments, math equations, insurance up to the wazoo for everything we can think of (life, disability, long term care, umbrella liability),and among the many of other things of course you need to keep giving back and educating yourself, which is why we post in these forums.
@James B,
Excellent reference to the coin analogy. We have been talking about that a lot with some of the other guys I work and invest with. We've been referring to the "third side" as "wisdom."
Two perspectives on each side of the coin, with the third being the "wisdom" to be gained from both.
Stay prosperous everybody!
PS - @Scott Huggins, keep reading. There are plenty more excellent books out there! Right in line with James' post...there is another side to the story...and the wisdom to be gained by reading and learning from it
Know thyself and thyself will be true.
Plan what you want, Buy what you need and manage it like it needs to be and you will be ok.
Same scale rather it be 1M or one house. Buy good investments and induce prudent money management and you will be fine.
Anything managed correctly will greatly reduce the risk.
IMO, some debt must utilized to grow a business. Most of us are not giving 1M in captial and allowed to spend freely.
To close,
Have a vision and objective of the money before it is ever allocated.
Proper business Debt while being Debt-free from the cash drainers is the ultimate concept
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.
Very sage advice. It really is about your comfort level.
Using real estate as leverage opens up a world of opportunity. That is one of the advantages of owning and investing in real estate. If a property has enough cash flow in good financial times this will not change in bad times. I don't follow market value with buy and hold properties. You would hope it would appreciate over time but this will not change your cash flow.
I have not personally read Ramsey books so I'm not sure what his motto is other than live debt free.I agree with bad debt and will always pay cash for toys and extras. If I can't pay pay cash for these "luxury" items I don't need them.
If you borrow money and someone else is servicing that debt and you're making a profit, that's a no-brainer.
Having tons of credit card debt and only paying the minimum balance is not good. Living pay check to pay check just to drive a lifted king ranch f-250 is not good. Those are the people Ramsey is targeting I believe. They don't have investing priorities and need help simply creating a budget and trimming their excess to save.
One of the first Ramsey baby steps is to save 1,000 dollars... I don't think most people buying SFR or MFR (for investment purposes) have an issue with having $0 savings.
I was reading a lot after renting out my first home and the one common theme I was hearing, was that the people who tend to fail in real estate investing don't have healthy reserves. Saving is just as important as leveraging.
I also read about a couple that would leverage 3 properties (while having an additional paid for property) and then pool the cash flow to pay one property off. This would decrease your risk of debt service during rough times. I'm thinking about doing this just to reduce my DTI for more financing.
Justin
I unfortunately come across clients all the time who are scrambling because they have no savings as they are nearing retirement. All too often they live in houses that are completely paid off. Its the American dream, right?
The problem is that they have all of their assets tied up in the walls of that house and it isn't doing a thing to contribute toward their retirement income. Every dollar of principal that you pay down on a mortgage is a dollar sitting idle. It will never generate an ROI and you will have a hard time getting it out when you need it most.
I've seen people with no savings whatsoever, at retirement age, living in $1M homes that are completely paid off. The students of Ramsey will say "Bravo!" But these people have a $1M net worth that cant generate $1.00 toward their retirement income! With proper, prior, planning, I could have done something.
I unfortunately come across clients all the time who are scrambling because they have no savings as they are nearing retirement. All too often they live in houses that are completely paid off. Its the American dream, right?
The problem is that they have all of their assets tied up in the walls of that house and it isn't doing a thing to contribute toward their retirement income. Every dollar of principal that you pay down on a mortgage is a dollar sitting idle. It will never generate an ROI and you will have a hard time getting it out when you need it most.
I've seen people with no savings whatsoever, at retirement age, living in $1M homes that are completely paid off. The students of Ramsey will say "Bravo!" But these people have a $1M net worth that cant generate $1.00 toward their retirement income! With proper, prior, planning, I could have done something.
The flip side to your scenario is people we all know people that overleveraged themselves thinking they knew the stock market or trying to be a house flipper and have lost everything included the equity in their house.
While I do not agree with Dave Ramsey about everything, there is a segment of the population( The ones that cant wait to buy their next flat screen because its only $29 a month) that needs to follow his plan
I used OPM to do my flips for many years but I will tell you I do sleep a little better at night with no debt
I unfortunately come across clients all the time who are scrambling because they have no savings as they are nearing retirement. All too often they live in houses that are completely paid off. Its the American dream, right?
The problem is that they have all of their assets tied up in the walls of that house and it isn't doing a thing to contribute toward their retirement income. Every dollar of principal that you pay down on a mortgage is a dollar sitting idle. It will never generate an ROI and you will have a hard time getting it out when you need it most.
I've seen people with no savings whatsoever, at retirement age, living in $1M homes that are completely paid off. The students of Ramsey will say "Bravo!" But these people have a $1M net worth that cant generate $1.00 toward their retirement income! With proper, prior, planning, I could have done something.
You do realize that baby step number four is save 15% for retirement and then baby step number six is pay off your house. Obviously, the people who you are referring to did not adhere to the Dave Ramsey plan.
You do realize that baby step number four is save 15% for retirement and then baby step number six is pay off your house. Obviously, the people who you are referring to did not adhere to the Dave Ramsey plan.
I've heard dozens of horror stories from people who lost everything in the last two market collapses. Even if they had put 15% away, had they followed the advice Dave gives to "Gayle" on p.148 of TMM, they WOULD have lost most of it. With absolute certainty.
For those of you who haven't read Total Money Makeover, Dave recommends to Gayle, who is 57 years old, that she put her money into growth mutual funds that "he says" average 12% annual returns. Growth mutual funds have higher average returns because they are riskier and more volatile than the stocks making up the broader S&P 500 index, which has a 25-year annualized return of 9.6%.
Anyone who put their life savings into technology mutual funds in 2007, received a very painful and costly lesson that you need to trade high returns and volatility for lower returns and safety as you get older.
The clients I deal with today that are approaching retirement age are in the exact position "Gayle" was in back in 2007. Now couple her stock market loss with the loss of a job or business as the economy went to hell. Had "Gayle" put her money into tech mutual funds in 2007, she would have lost 50-60% of her retirement fund. If she further lost her job and needed to tap into her IRA or 401(k), she would painfully find out that the IRS is going to tax every dollar of withdrawal at full-income tax rates AND a 10% penalty on top of that. Now the 40-50% remaining savings is looking more like 25-30%.
Thanks for the great advice Dave!
You do realize that baby step number four is save 15% for retirement and then baby step number six is pay off your house. Obviously, the people who you are referring to did not adhere to the Dave Ramsey plan.
I've heard dozens of horror stories from people who lost everything in the last two market collapses. Even if they had put 15% away, had they followed the advice Dave gives to "Gayle" on p.148 of TMM, they WOULD have lost most of it. With absolute certainty.
For those of you who haven't read Total Money Makeover, Dave recommends to Gayle, who is 57 years old, that she put her money into growth mutual funds that "he says" average 12% annual returns. Growth mutual funds have higher average returns because they are riskier and more volatile than the stocks making up the broader S&P 500 index, which has a 25-year annualized return of 9.6%.
Anyone who put their life savings into technology mutual funds in 2007, received a very painful and costly lesson that you need to trade high returns and volatility for lower returns and safety as you get older.
The clients I deal with today that are approaching retirement age are in the exact position "Gayle" was in back in 2007. Now couple her stock market loss with the loss of a job or business as the economy went to hell. Had "Gayle" put her money into tech mutual funds in 2007, she would have lost 50-60% of her retirement fund. If she further lost her job and needed to tap into her IRA or 401(k), she would painfully find out that the IRS is going to tax every dollar of withdrawal at full-income tax rates AND a 10% penalty on top of that. Now the 40-50% remaining savings is looking more like 25-30%.
Thanks for the great advice Dave!
Since you speak of "Gayle's" retirement funds that were not needed in 2007. If "Gayle" had left those funds in her retirement that "50-60%" loss(which we both no is not a loss unless she sold her holdings" has long since recovered and even accrued a sizeable gain has it not ?
Well, in my example she DID need the money. But that's fine. I'll play along. By my calculations the market (S&P500) has had an annualized return of only 3.5% per year since the peak in 2007. Dave told her she could expect 12% per year. She has a "sizable" gain (32%), but that only got her money back and a 3.5% annualized return. At 12%, she should have close to 1.5X of her savings back in 2007.
Do you want to see what the numbers would look like if she had put her money into that "Evil" life insurance that Dave hates? Here's my analysis: http://www.screencast.com/t/Bw0YvlntBKOi
Well, in my example she DID need the money. But that's fine. I'll play along. By my calculations the market (S&P500) has had an annualized return of only 3.5% per year since the peak in 2007. Dave told her she could expect 12% per year. She has a "sizable" gain (32%), but that only got her money back and a 3.5% annualized return. At 12%, she should have close to 1.5X of her savings back in 2007.
Do you want to see what the numbers would look like if she had put her money into that "Evil" life insurance that Dave hates? Here's my analysis: http://www.screencast.com/t/Bw0YvlntBKOi
I assume you have listened to his program. Like I said, I am not a huge fan but understand the basics of his program for those who struggle with debt and such. 8-10% returns do not excite me in the least
if "Gayle" lost 50-60% of her retirement and did not cash out and had her funds spread across several top funds as Dave "preaches" she would have recoup her losses plus had significant gains by 2015. There are many many funds out there that have exceed 10% annually since 2007
Since we are playing along, what happens to "Gayle's" investment inside that life insurance product if she dies ?
I assume you have listened to his program. Like I said, I am not a huge fan but understand the basics of his program for those who struggle with debt and such. 8-10% returns do not excite me in the least
if "Gayle" lost 50-60% of her retirement and did not cash out and had her funds spread across several top funds as Dave "preaches" she would have recoup her losses plus had significant gains by 2015. There are many many funds out there that have exceed 10% annually since 2007
Since we are playing along, what happens to "Gayle's" investment inside that life insurance product if she dies ?
I'm calling BS on funds exceeding 10% since 2007. Very few funds managed to escape the crash and still return 10% from the 2007 highs. That would take 20-20 hindsight to predict. It was very easy to return 10% annualized returns if you start from the bottom of the market in 2009.
What happens to her wealth if she doesn't have life insurance? It goes to her heirs via will/probate. If you store your wealth in cash value life insurance, then it passes to your heirs with none of the difficulty of probate. Plus whatever death benefit the policy carries. Its a very efficient wealth transfer vehicle. While she is alive, the cash value provides about 2-3X the income dollar for dollar of what a brokerage account or IRA would generate. That's another of Ramsey's mistakes. He focuses on asset accumulation rather than income. These videos explain why life insurance can provide so much more income than the 4% Rule:
theirs residents living in the building the one to purchase
Owns other property and buisness that can be used as credit a way of not using. Money.what study read is the way to go.
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.
I think there is a lot of value with investing in something that you understand. It can give you the confidence to go against the crowd. If the masses are avoiding an investment, it could be a great opportunity for someone who understands the investment because the price will be lower because no one else wants it.
I love college rentals. I have lived in college towns pretty much my entire adult life. I love to bet on something I know and understand even if the numbers are not the best.
People who do not understand college rentals call it risky. If they don't understand the investment, I think it would be risky for them. However, you can reduce risk through education and experience.