Dave Ramsey Philosophy + Buy & Hold Strategy = ........Reality???
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Rental Property Investor · Cleveland, OH · Member since 2015 · 1k+ posts · 880 votes
10yDave Ramsey is awesome. Robert Kiyosaki is awesome! Everything is awesome! (sorry, I have kids and we watch lego movie a lot)
Dave Ramsey detests debt... but so do all the other investors when you compare apples to apples. Debt for your own personal life is bad. It makes you a slave to whatever it is that you're paying on. Debt for business is leverage and, additionally, asset protection. When it comes to debt, Robert Kiyosaki advises to make sure that personal debts are small and if you do take on debt, make sure someone is paying you to do so. There is risk in debt, but you are paid accordingly to manage that risk.
Purchasing rental property in cash with no debt is doable for sure, but it completely eliminates the advantages that real estate provides as an investment and equity growth vehicle.
66 Replies
- Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes10y
25 posts and I couldn't find the word risk. Leverage involves risk. That is so often glossed over by gurus like Robert kiyosaki. Intelligent Real estate investing is not a get rich quick scheme, almost inevitably there will be downturns often severe which will make those who didn't fully factor in risk suddenly very aware of it.
Btw I know people who make 7-figure incomes who could greatly benefit from adhering to Dave Ramsey's plan. Not sure those people are the lowest common denominator.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
Buying any kind of real estate entails risk, whether you leverage or pay cash. Anyone who has fooled themselves into believing they are playing risk-averse or risk-free because they paid cash is a fool. There is no such thing as owning your properties free and clear; there is always property taxes, insurance, capital expenditures, and maintenance to be paid. The only thing leverage does is add a note to the aforementioned list. If the note takes $200/month from a $500/month free and clear property, but allows for purchase of another $500/month free & clear property, who is running the bigger risk? The guy who now brings in $800/month F&C and has cut his vacancy risk by 50%, or the guy with all his cash sunk in one property? And anyone that is bringing in 7 figures of income and is over leveraged is a fool; if you have made it to that bar, common sense tells you to eliminate some risk or build one hell of a war chest.
Skyline Properties - 10yChris K.Pro MemberInvestor · Baltimore, MD · Member since 2012 · 1k+ posts · 655 votes
I love Dave too and listen to him everynight but if I followed his teachings 100% I wouldn't be where I am now. Granted I was always good with my money and never really spent it on alot of material things but I did get a credit card the month I turned 18 and have taken out loans for credit building purposes. If it weren't for my great credit I wouldn't have as many properties as I have now.
I do believe there is a such thing as "good-debt" and for alot of people that's the only way they're going to make it.
- 10yJohn HornerPro MemberFlipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
Dave's strategy is solid and will work very well over a long period of time... but if you want to be above average and have a little more then everyone else you are going to have to take more risk then Dave would have you take.
I love Dave's philosophy, it's just too fun to shoot for the moon for me to follow it :)
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
@JD Martin So do you only look at the upside of leverage? If you take your same philosophy and apply it to a situation that does take place all of the time, the more risk you take the larger the losses. So you cannot just say that when you borrow money that it's just a win, win. Sometimes leveraging properties can completely wipe you out like 2008 when the housing market crashed.
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
Originally posted by @JD Martin:
Buying any kind of real estate entails risk, whether you leverage or pay cash. Anyone who has fooled themselves into believing they are playing risk-averse or risk-free because they paid cash is a fool. There is no such thing as owning your properties free and clear; there is always property taxes, insurance, capital expenditures, and maintenance to be paid. The only thing leverage does is add a note to the aforementioned list. If the note takes $200/month from a $500/month free and clear property, but allows for purchase of another $500/month free & clear property, who is running the bigger risk? The guy who now brings in $800/month F&C and has cut his vacancy risk by 50%, or the guy with all his cash sunk in one property? And anyone that is bringing in 7 figures of income and is over leveraged is a fool; if you have made it to that bar, common sense tells you to eliminate some risk or build one hell of a war chest.
Yes, but there is a difference that your missing. If one pays cash, that means they owe no one a mortgage or interest. If one takes out a loan, they owe the mortgage, the interest, the insurance, the taxes, the maintenance, etc.... So if one defaults with a mortgage because they cannot make the payments, they take a huge hit with their credit score and finances and may even declare bankruptcy. Especially, if the property declines in value and now they owe more on it then its worth. If one pays cash, they don't declare bankruptcy because they own the property and can simply sell it for a gain.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
Originally posted by @Marcus Johnson:
Originally posted by @JD Martin:
Buying any kind of real estate entails risk, whether you leverage or pay cash...
...If one pays cash, they don't declare bankruptcy because they own the property and can simply sell it for a gain.
Marcus, just what "gain" are you talking about? Consider this scenario: you bought your home in 2006 for $200k cash and then in 2008 can't pay your taxes and got foreclosed upon. You then ended up with just $50k that your home was then sold for. You hardly got rich that way! You took a risk with your $200k cash, and got burned! What's Dave got to say about that?
To invest "wisely" (whether with your own cash or with borrowed money), risk factors such as the potential for future global financial collapse will have ALREADY been considered! (It was the BANKS that got too greedy back in 2006-7, and wise investors already saw that, and DIDN'T get burned by over-leveraging at that time). Cheers...
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
@JD Martin, I wanted to vote for your post, but it registered as "0". That has also happened before with some other posters. Does anyone know why?
It looks to me like the smart (ie. our own AND using other peoples) money is on your approach rather than that proposed by @Marcus Johnson. Even those of us posting here who agree in principle with "no debt", have ended up realizing that it's just too darned slow to get where you want to get to with just our own previously earned and saved dollars.
On a side note, I trust that Dave will not allow purchase of his books and tutorials and seminars by credit card?...
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
Originally posted by @Marcus Johnson:
@JD Martin So do you only look at the upside of leverage? If you take your same philosophy and apply it to a situation that does take place all of the time, the more risk you take the larger the losses. So you cannot just say that when you borrow money that it's just a win, win. Sometimes leveraging properties can completely wipe you out like 2008 when the housing market crashed.
Of course not. And smart investors are not getting wiped out in housing market crashes, they are buying property. The only people who were wiped out were those who had to sell. If you own 20 properties mortgaged to the hilt with $50 cash flow per door, with no cash reserves, you are probably in a perilous position. If you are a smart investor, with high cash returns per door, large cash reserves, and reasonable leverage, you are waiting for a market correction so you can buy more properties in the valley. Smart investors know that you make your money when you buy the property. If you overpaid for the property, it makes little difference if you're leveraged or not. In fact, if you want to look at it from what some might consider an unethical point of view, you are in better shape if you are overleveraged in a crash, provided you have properly shielded your personal assets. I deal with large housing developers on a regular basis, most of whom use 8 figure loans or more from the banks to do their projects, and none of them went belly-up during the last downturn.
Skyline Properties - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
Originally posted by @Brent Coombs:
@JD Martin, I wanted to vote for your post, but it registered as "0". That has also happened before with some other posters. Does anyone know why?
It looks to me like the smart (ie. our own AND using other peoples) money is on your approach rather than that proposed by @Marcus Johnson. Even those of us posting here who agree in principle with "no debt", have ended up realizing that it's just too darned slow to get where you want to get to with just our own previously earned and saved dollars.
On a side note, I trust that Dave will not allow purchase of his books and tutorials and seminars by credit card?...
No idea, but thanks :) . The "no debt at any cost" crowd has to fall into one of the following categories:
- They have been blessed with some huge pool of money from which to puchase buy & holds such that no debt is necessary for their desired annual cash flow;
- They are satisfied with relatively low levels of annual cash flow in comparison to their comfort with any type of risk;
- They believe they are immortal, or nearly immortal, such that they have plenty of centuries to apply Dave's (and it's not really his) "Snowball effect" to purchasing properties.
Anyone who falls outside those parameters is a good candidate to use leverage to build wealth. And honestly, if you didn't want to use any leverage, why even bother with real estate? There are plenty of reasonably safe mutual funds that can net anywhere from 3-10% annually, are immediately liquid, and don't entail any kind of vacancy, maintenance, capital expenditures, insurance, or property taxes, much less dealing with tenants and the ******** many of them bring to the table.
Skyline Properties - Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
@JD Martin, have the BP moderators got it in for you? Still no votes allowed from me for your latest posts either. Anyone else tried to vote for Jd?...
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
Originally posted by @Brent Coombs:
Originally posted by @Marcus Johnson:
Originally posted by @JD Martin:
Buying any kind of real estate entails risk, whether you leverage or pay cash...
...If one pays cash, they don't declare bankruptcy because they own the property and can simply sell it for a gain.
Marcus, just what "gain" are you talking about?
Whoops sorry, I didn't mean to use the word gain. I meant to use equity. Unless the house has completely tanked and isn't worth $1, you'd have equity to be able to sell it if you got into a rough spot, unlike someone who borrows and takes a huge mortgage out, they would be completely screwed not being able to sell at a loss, because they don't have any money to make up the loss. Plus they still owe the mortgage.
Consider this scenario: you bought your home in 2006 for $200k cash and then in 2008 can't pay your taxes and got foreclosed upon. You then ended up with just $50k that your home was then sold for. You hardly got rich that way! You took a risk with your $200k cash, and got burned! What's Dave got to say about that?
Not possible. The person who has the mortage 99% of the time is the one who defaults and declares bankruptcy. In your scenario, why wouldn't the cash buyer just sell the property to prevent the foreclosure or better yet borrow against the paid for property.
Let's use your scenario as an example for the differences between a cash buyer and someone taking out a mortgage. If two individuals buy an investment property for the purchase price of 200k. Buyer A has the money saved up and pays cash for the property. The closing costs are minimal because it's a cash purchase. Buyer B doesn't have the money, except for 10% down and has to take a mortgage out for 180k, plus 6% closing costs which is the average for my area. Now the market takes a huge downturn and both properties are now worth 100k and like you said in 2008 both individuals cannot make the tax payments and are being threatened with foreclosure.
Buyer A can just sell the property worst case or borrow against the property to cover expenses until things improve like the housing market has to the present time. Buyer B, because they borrowed 180k cannot sell because they owe 180k and have no equity to borrow against. So they foreclose and now their credit score is damaged and are unable to borrow money on real estate for 5 to 7 years.. Plus they are probably going to be sued for the difference of what the auction brings for the sale of the house.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
@JD Martin, ah, it looks like the vote police have waived their objections...
@Marcus Johnson, according to the cash-only philosophy/religion, there will be NO borrowing allowed by Buyer A. If the market won't bear more than $100k when access is needed to its value, then it's $100k LOST!
Buyer B (who had $200k in the first place but didn't use it for just one property), still had a large enough cash reserve to keep their loans paid on time, and thus was able to ride out the crisis.
Yes, we can all make up stories to emphasize our points. I'm not even sure Dave is against EVER borrowing for ANYTHING. But looking at some of his previous history, I can certainly understand his subsequent mission to rail against borrowing. From Wiki:- ..."Ramsey's success soon came to an end as the Tax Reform Act of 1986 began to have a negative impact on the real estate business. One of Ramsey's largest creditors was sold to a larger bank, which began to take a harder look at Ramsey's borrowing habits. The bank demanded he pay $1.2 million worth of short-term notes within 90 days, forcing him to file for bankruptcy relief".
(Everyone, please note that there is a BIG distinction between "leveraging" and "over-leveraging")...
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
Originally posted by @Marcus Johnson:
Let's use your scenario as an example for the differences between a cash buyer and someone taking out a mortgage. If two individuals buy an investment property for the purchase price of 200k. Buyer A has the money saved up and pays cash for the property. The closing costs are minimal because it's a cash purchase. Buyer B doesn't have the money, except for 10% down and has to take a mortgage out for 180k, plus 6% closing costs which is the average for my area. Now the market takes a huge downturn and both properties are now worth 100k and like you said in 2008 both individuals cannot make the tax payments and are being threatened with foreclosure.
This is not apples to apples because the two individuals in question in your example are not starting with the same amount of money. Apples to apples would be this: Buyer A has $200k saved up and spends said $200k on a house. Buyer B has $200k saved up and spends $100k on 2 houses each, OR spends $20k on 10% down (as in your example) and puts $180k in the bank earning some paltry rate of return, let's say 1%.
Now let's look at your scenario. The market hits a downturn and each buyer has a house go completely vacant, and have taxes that need to be paid. In the first example, Buyer A better start digging in his wallet and hope that he bankrolled the extra couple hundred he wasn't paying on a mortgage every month. Buyer B made almost double the profit of Buyer A during the period that both houses were rented, so he had more to bankroll, but if he lived extravagant, he applies the profit from House 2 to the costs of House 1 and rides out the storm.
In the second example, Buyer A still better start digging in his wallet. Buyer B simply taps that massive pool of liquidity sitting in the bank making peanuts, pays the taxes and is on his way.
Dave Ramsey can say whatever he wants about the issue, but the success of our entire economic system is based on leverage. Nothing but the purchase of the most paltry of consumer goods would happen without leverage - no real estate deals, commercial start-ups or expansion, inventions, purchase of large business and consumer goods.
Instead of thinking about it in terms of dollar bills, think about it in terms of resources. Let me give you an example: Two neighbors, side by side, both primary earners work at the same company in the same job title, trying to decide what is the best financial arrangement for working. House A decides one will work, and one will stay home and handle necessary but non-paying administrative/domestic issues, making life much cheaper (no eating at Applebee's, for example). House B decides both will work and they will spend more on domestic/administrative issues since both are working. House A makes $20/hr, House B makes $20/hr + $10/hr. Company shuts down and both primary earners are out of work. Who is worse off? House A, without question, unless House B's extra obligations from the extra worker are so exorbitant as to have left no extra money left over. In this example, House A is the Cash house owner, House B is the leveraged 2-house owner. If House B ate at Ruth Chris every night instead of Applebee's, they may be worse off; otherwise, their incremental expense was less than the added income from another worker.
There is a difference between leverage and over-leverage. There's no formula as to what is over-leverage, as it depends on the circumstances of the individual and the nature of the properties. If you have enough liquidity to cover shortfalls for your entire life, you are probably not over-leveraged (though you may be a dumb investor). If you have a paltry $100 monthly mortgage to make, but have 50 bucks in your checking account and need every penny of cash flow to live, you are probably over-leveraged.
Skyline Properties - Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
Originally posted by @Brent Coombs:
@JD Martin, ah, it looks like the vote police have waived their objections...
@Marcus Johnson, according to the cash-only philosophy/religion, there will be NO borrowing allowed by Buyer A. If the market won't bear more than $100k when access is needed to its value, then it's $100k LOST!
Not if it helps to prevent a foreclosure, plus the property can simply be sold for 100k if need be.
Buyer B (who had $200k in the first place but didn't use it for just one property), still had a large enough cash reserve to keep their loans paid on time, and thus was able to ride out the crisis.
In my scenario, Buyer B doesn't have any more money, that's why they had to take out such a large mortgage. You hear that all the time on the Bigger Pockets forum.
Yes, we can all make up scenarios that help to prove our point of view. I do agree with that. As for Dave Ramsey, the only time he believes in borrowing money is for your primary home, not investment properties. And in that case it's that the amount of your mortage payment be no more then 25% of your Gross income and on a 15 year note or better. I personally believe that putting 20 to 25% DP on investment properties is advantageous because it forces you to have skin in the game and to make good decisions. Plus it allows for a smaller mortgage amount and less interest paid over the life of the loan.
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
All I'm trying point out in this experiment is that it's totally possible. Slow at first, just like a train. It takes a while for it to get up to speed, but then good luck stopping the train. :) My own investing ideas are a mixture of low debt, quality duplex's, good neighborhood, high cash flow and 25% DP with conventional loans.
- Investor · Chicago, IL · Member since 2013 · 451 posts · 96 votes10y
I like both speakers. I would love to purchase a multi-unit with a loan and use leverage, but at the moment I'm purchasing homes under 50k including the rehab and as long as I can make this type of purchase and have it rented in a year every year. I'll remain debt free on both sides of the fence personal and business.
Although i'm not doing it now my vote is on leverage.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
Originally posted by @Marcus Johnson:
All I'm trying point out in this experiment is that it's totally possible. Slow at first, just like a train. It takes a while for it to get up to speed, but then good luck stopping the train. :) My own investing ideas are a mixture of low debt, quality duplex's, good neighborhood, high cash flow and 25% DP with conventional loans.
I'm not going to bother with the numbers, only to point out that everything you posted about Buyer A is true for Buyer B but multiplied by a factor of however many units he/she has minus the incremental cost of the leverage. There is simply no way, for most people, that they have enough years to work another job and save enough cash to have this method of building wealth make sense. Even you realize this, unless you just like carrying notes of 75% of the cost of your units. The "DR" strategy - and it's not even his strategy, just his profit center - only works given enough years or enough outside income earned to save enough cash to purchase enough units to make this strategy work. Time is not your friend with this method; time is your enemy.
Also, to address another of Guru Dave's Commandments, "Thou shalt encumber debt only to purchase thy primary residence". If debt is truly the enemy, then purchasing a house to live in with debt is the ultimate folly. From a financially rational point of view, the best debt would be that which produces the greatest amount of income, while the worst debt would be that which absorbs the greatest amount of income. For example, college student loan debt that allows one to earn 5X more money is smarter than buying a Porsche, financially speaking. Given that, purchasing an investment property with debt that produces healthy rental income and living in a travel trailer in your parent's driveway is smarter than purchasing a nice little ranch to live in, financially speaking. And many people realize this - they will buy a duplex or apartment building and live in the crappy basement while renting out the nicer apartments above.
Whether to play Devil's Advocate, or out of genuine misunderstanding, you are confusing level of comfort with a rational financial decision. Equity sitting idle might make you sleep better at night, and that is worth something, but that is still not the best use of that money, financially speaking. I don't discount the value of having some properties free and clear, or having strong positions in property, both of which I personally have, but that is more a function of personal comfort than rational decisiveness when it comes to finance.
Skyline Properties - Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
Originally posted by @JD Martin:
Originally posted by @Marcus Johnson:
I'm not going to bother with the numbers, only to point out that everything you posted about Buyer A is true for Buyer B but multiplied by a factor of however many units he/she has minus the incremental cost of the leverage. There is simply no way, for most people, that they have enough years to work another job and save enough cash to have this method of building wealth make sense. Even you realize this, unless you just like carrying notes of 75% of the cost of your units. The "DR" strategy - and it's not even his strategy, just his profit center - only works given enough years or enough outside income earned to save enough cash to purchase enough units to make this strategy work. Time is not your friend with this method; time is your enemy.
That simply isn't true. If Buyer B leverages 10 properties each @ 180k @ 4% for 30 years, it ends up being very expensive in terms of interest and PMI payments, versus Buyer A which doesn't have these additional costs. Using the example above, if you use a mortgage calculator the interest for the life of the loan is $124,000 and the PMI ends up being $5,000. Multiple that by 10 properties and now your going to pay over 1 million in interest and 50k in PMI. Also, stastically since the leveraged buyer is able to buy more properties versus the cash buyer, the expenses over time are much greater.. If Buyer B is able to buy 10 properties and Buyer A because he pays cash only has 5 properties, statisically Buyer B has a higher rate of expenses then Buyer A because he has 10 roofs versus 5 that could go bad, 20 furnaces that may go bad versus 10, 20 water heaters versus 10, etc.....
- Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes10y
The real estate investors who truly grow the largest, are the ones who leverage debt. Gaining 5% appreciation on a $300,000 house where you owe debt, grows your equity pretty significantly vs having a $50,000 SFR in a C class neighborhood that cashflows $400 per month
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
Originally posted by @Vincent Crane:
The real estate investors who truly grow the largest, are the ones who leverage debt. Gaining 5% appreciation on a $300,000 house where you owe debt, grows your equity pretty significantly vs having a $50,000 SFR in a C class neighborhood that cashflows $400 per month
Yes, I agree risk = reward or devastation. Everyone needs to manage their own risk level. One needs to be wise when using debt for it can lead complete hardship.
- Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes10yRj J. Dave teaches how to have peace and security, plus obtain wealth. I've known lots of wealthy people that have no peace, nor security. What's more important wealth, or peace? Dave is worth close to 200 million and he sleeps like a baby :) I personally run my personal life in accordance to dave's teaching and I'm moving my business in that direction. The questions I often ask myself is what's important in life, how much is enough, what's my time worth, is all this worth the stress? The richest man in the world, laying on his deathbed, would give up his riches for a little more time.
- Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes10y
"... using the cashflow to pay down the mortgage so that at some point in time the property is paid off. What do you think of this strategy? Is it realistic?"
There are two schools of thought on this:
- 1. Reduce the mortgage to zero and create a cash cow
- 2. Create equity by paying down until you can refi and use the cash for another purchase.
I started with (1) as a goal but realized that it impacts your end-game and the tax consequences. No mortgage says you get no depreciation allowance and your y-y taxes go up. When you do sell, the depreciation recapture will reduce your basis to zero and the net gain will be the sales price and the capital gains tax rate is applied to the sales price :yuck: The only winning solution is to vest title into a Living Trust and let your heirs inherit tax free.
Money and debt management go hand-in-hand, and debt is using OPM. The trick is getting the timeline correctly so maximize(cash flow) while minimize(taxes).
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
There is simply no way, for most people, that they have enough years to work another job and save enough cash to have this method of building wealth make sense. Even you realize this, unless you just like carrying notes of 75% of the cost of your units. The "DR" strategy - and it's not even his strategy, just his profit center - only works given enough years or enough outside income earned to save enough cash to purchase enough units to make this strategy work. Time is not your friend with this method; time is your enemy.
Of course it's possible as I've laid out in my last post. With a decent job, working extra jobs and saving, you can easily get your first Duplex in 5 years paid for with cash. And the next one even sooner with help from the cash flow from the first. I would have gone with this strategy if I hadn't wasted my 20's on having fun. By now I could have had 5 all paid for properties in my 40's. Now I'm married with a kid and soon to be another, so it isn't realistic now, because I need the cash flow from my current duplex to buy the next one with 25% DP.
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