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
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
Originally posted by @Marcus Johnson:
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.....
I'm not sure if you're being a contrarian or just enjoy the banter, so I'm going to bow out of this discussion. You personally are doing exactly what you are arguing against, which makes no sense, and it's not because you got started in your 40s. The amount of interest paid (or PMI, which generally doesn't apply because banks are not going to lend you more than 80% LTV anyway) doesn't make an ounce of difference so long as the property cash flows, strictly financially speaking. Every time you post an example you leave out the income portion of the equation and only speak of costs. Investors far, far smarter than you and I put together understand this - the biggest investors in the world almost always use leverage to compound their earnings abilities. I deal with major housing subdivision developers that create 9 figure upscale developments in my "day" job, and guess what? None of them "saved up their money" to build the development. No, they leveraged the bank's money into the development. Is there some risk? Of course, just as there would be some risk if they "saved up their money" and plowed it into a development. By using leverage, they often have 3-5 developments or more going all the time, and if one gets soft the other 4 are still plugging along. Contrary to popular belief, all the developers didn't go under in the last recession - only the ones who didn't understand the proper way to use leverage. 95% leverage and razor-thin margins usually don't work, but 75% leverage and healthy cash flow works just fine - but you know this, because you are leveraged 75%. You should be saving up your money, because in 20 years you'd have 3 or 4 cash free properties, right?
If you don't understand this, then I'm sorry, but you don't understand leverage or the power of multiplication. More power to you, and I hope you use the leverage that you don't understand to make you more money than would be possible leaving your capital idle.
Skyline Properties - Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10y
Originally posted by @JD Martin:
Originally posted by @Marcus Johnson:
Originally posted by @JD Martin:
Originally posted by @Marcus Johnson:
If you don't understand this, then I'm sorry, but you don't understand leverage or the power of multiplication. More power to you, and I hope you use the leverage that you don't understand to make you more money than would be possible leaving your capital idle.
Blanket statements such as these prove to me you haven't read a word I've said. And yes I do understand leverage, compound interest and the power of multiplication and for you to assume that is a completely ignorant statement. I explained before that I use leverage and put 25% DP on my investment properties and primary. I also have used the compound interest to grow my Vanguard portfolio, as well as my 401k's. What you missed is that you cannot completely blow of a million dollars of interest payments on the lifetime of mortgages and those you never paid them. Plus you cannot gloss over the fact that your expenses are much higher when you own a lot of properties.
It isn't how many properties you have, it's about the ROI and if I can get that result with less properties more power to me, because the expenses statistically are much lower. Furthermore I forgot to mention other expenses such as double the amount of LLC renewal fees per year, double the amount of License renewal fees, lawn moving services, snow removal, flooring, where does this list end?
Again I refer back former cash only example and had I started in my 20's without being married or having children, then I would have been well on my way with a cash only real estate endeavor. Because that no longer make sense due to my present state, I prefer to buy with 25% DP, in appreciative neigborhoods, with quality tenants and excellent cash flow.
- Residential Real Estate Broker · Penn Valley, CA · Member since 2014 · 14 posts · 2 votes10y
I'm surprised that no is mentioning the tax implications of the 2 approaches. Even if one is comfortable with owning less properties outright, there is the fact that you will not be able to keep as much of your cash flow because each will have higher taxable income outpacing the inherent tax advantages of rentals. Buying right ( below market and leveraging very conservatively ( 50-60% overall loan to value) seems to me to be the sweet spot in terms of real estate investing and limiting risk. The other factor is that with more properties you spreading the risk as has been discussed here.
- Attorney · Louisville, KY · Member since 2015 · 46 posts · 4 votes10y
Thank you for this post! I was just about to ask the same question.
- Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes10y
Originally posted by @Steve Vaughan:
I'd be Ramsey and Kyosaki's evil step-child! I carry no personal debt. No car payments, student loan, CCs, personal loans, etc. It's awesome not having to all my available money to everyone and not having to manage all those stupid payments!
However, I have RE debt. Quite a bit. Paying it down, but utilizing intelligent, managed leverage has put me way ahead of where I would be if I never used it. I may have 2 paid-off houses vs 3 dozen doors.
To answer your question of who has done it the Ramsey way specifically, I would like to invite my debt-free colleague @Julie Kern to the discussion. Hi, Julie! :-)
Hey Steve - What about your personal residence?
Lancce
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes10y
Hey @Lance Robinson thanks for the mention and giving a rip about what I did / do!
My personal residence also has a mother-in-law apt and does have debt. A 15-yr at 3.375% mortgage. 11 years left. Refi'd from a 30-yr at 6.5% in 2012. Refinancing will save us $193,000 in interest over amortizing what the 30yr would have been!
Our net cost is $100/mo basically. The principle buy down is $1100/mo and the renter pays $800 against our $1900 pmt. $100/mo in reserves for the rental.
Our primary is down the list on the snowball of complete debt-freedom because of this. One of my 7-unit apts will be paid off the same year as my primary. After my 10unit mixed-use apt bld is paid off shortly, next will be a little rental house. Look out below- the snowball is gettin' huge! I'll be posting about my mortgage burning parties, so stay tuned!
- Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes10y
I was doing the personal Dave Ramsey plan before I even knew who he was. Paid down the car, put that payment to the second car and then those two to the house and then paid it off and all that good stuff.
From a business standpoint however I feel differently. Leveraging lets me put my equity to use while cashflowing and building additional equity at someone else's expense. When I decided to cash out refinance my first rental to build my second I knew that it would cut my CF in half but also knew that the new CF from the free and clear new construction would cash flow almost double the note. Also, I don't want to pay down that $90,000.00 refi. just to make an extra 445/month. Instead, I'll repeat this as long as I can get lots for deals. This same kind of thinking is applied to paying down my mortgage on my personal residence just to save $60/month in PMI. Instead of paying it down, I'll invest in funds and/or RE.
Paying down a mortgage for the additional cashflow is akin to putting that extra principal payment in the 4th bedroom for 5/10 years and then taking monthly distributions of what your PITI was.
Owning a home is a liability no matter how you cut it, why not let someone else pay for it?
Having the rental debt doesn't bother me because I have a healthy personal emergency fund and reserves for the rentals. Those are DR things too right?
Justin
- Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes10y
Originally posted by @Steve Vaughan:
Hey @Lance Robinson thanks for the mention and giving a rip about what I did / do!
My personal residence also has a mother-in-law apt and does have debt. A 15-yr at 3.375% mortgage. 11 years left. Refi'd from a 30-yr at 6.5% in 2012. Refinancing will save us $193,000 in interest over amortizing what the 30yr would have been!
Our net cost is $100/mo basically. The principle buy down is $1100/mo and the renter pays $800 against our $1900 pmt. $100/mo in reserves for the rental.
Our primary is down the list on the snowball of complete debt-freedom because of this. One of my 7-unit apts will be paid off the same year as my primary. After my 10unit mixed-use apt bld is paid off shortly, next will be a little rental house. Look out below- the snowball is gettin' huge! I'll be posting about my mortgage burning parties, so stay tuned!
Awesome man, thanks for sharing! I own a bunch of properties, but I still rent personally. Single, luxury apartment complex and amenities, much cheaper for me than buying.
I always wonder how leveraged I want to get. I could pay off everything I own now and retire for the rest of my life more than comfortably, but I want to keep going for a few more years before I start a snowball paydown : )
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes10yRemind you Dave Ramsey went broke when he leveraged to much and the banks called the loans. He declared bankruptcy, so you cannot tell me something like this couldn't happen to you. The second time around he got smart and stopped using debt and is now a multimillionaire who owns debt free his 15 million dollar office building, his 5 million dollar home and a bunch of investment properties. So I guess it isn't possible according to most of you.
- Rental Property Investor · Maria Stein, OH · Member since 2015 · 7 posts · 7 votes10y
Interesting discussion, I try to combine a Ramsey, Kiyosaki, and Tim Ferris approach to Real Estate..............Talk about conflicting views. The power of BP and self education is we all get to take all of this info in and filter it to what makes sense for us, our beliefs, strategy, etc.
My imperfect approach:
1. Avoid Personal debt (Ramsey), it takes money out of your pocket every month.
2. Several people have said this and the math shows that to maximize cash flow and ability to build wealth/equity, we should Use Other People's Money (OPM) (Kiyosaki), but be smart about it. Understand the risk and think thru what are the worst things that could happen if given an awful market condition or an awful tenant experiences, and protect yourself accordingly.
2b. Also use Other people's time (OPT) as much as possible, it has the same effect as leveraging money. If I did all of the work/maintenance on my rentals, I think I would have 3-5 right now. I have 11 (13 doors) likely because of OPM and OPT. This is still small, but more than if I used all of my time and all of my money.
3. Once you begin to hit your cash flow goals, use the Ramsey approach to attack your real estate debt like he says to attack personal debt. Start to pay off your lowest balance, highest rate or highest risk mortgages. Example, I'm gonna pay off a $40k variable rate mortgage before a $70k fixed rate mortgage.
4. Use lifestyle design (Ferris) throughout the process to clarify at what point you've hit your primary goals and when to change your approach, at what point to focus more on pay down and risk avoidance vs. cash flow. This could be at $5k, $10k, or $50k per month. Also set lifestyle goals throughout to motivate you to hit certain goals. Go to Hawaii when you hit $5k. Maybe a Safari at $10k. You get the point.
Great discussion, thanks all for contributing. Regardless of your view, having read Ramsey, Kiyosaki, Ferris and using BP puts us ahead of 95% of Americans.
- Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes10y
Hubby & I first attended a Dave Ramsey seminar at our church in 2006. At the time, we had no debt except our home mortgage and a mortgage on our business property. We did not cut up all our credit cards as he suggests since we use them for our business and pay them off every month.
We paid off our home, then our business RE. Then we started really saving.
In addition to those 2 properties, we now own 10 SFH, all of which were bought and renovated with our own money - no loans. Our average ROI is 14.6%. No, these are not C/D class rentals. There are plenty of run-down rental houses in our small town, and we feel no need to compete with that kind of landlord. We are known as the landlords with the "nice" rental houses, and we like it that way.
So yes, it can be done.
And for those of you who continue to pay thousands in mortgage interest every year because you're afraid that your tax bill will be too high, try this. Pay off the mortgage and donate to your favorite charity the amount you would have paid in interest. You'll get the same tax deduction and do some good as well.
- Real Estate Agent · Lowell, OR · Member since 2016 · 33 posts · 11 votes10y
@Julie Haveman This is exactly what I want to do! My husband as the handyman and I would do the property management. How did you get started? Living in Hawaii has its challenges...properties are really expensive! Any words of wisdom would be awesome!
@Rj J.I love Dave Ramsey! My husband and I were getting crazy with our personal "whatever" spending and of course our food budget so we now do cash envelopes! Its hard but it works! However, I second what most others have said about Dave's view on debt. I have definitely been living in an ideal "debt-free" mind-set for a while and that we would have enough money to buy a house cash in a few years but realistically, the inflation rate on our dollar is increasing faster than the rate of savings for us and you could essentially say that we are losing money by NOT investing in something (real estate) that would make us money...in turn..saving more in the long run! Get it! Just be wise with leveraging and always remember that the goal of Dave Rasmey is to live debt-free...which can be done (sometimes even quickly) by investing in RE!
@Phil Moeller I absolutely love the blend of Ramsey, Kiyosaki and Ferriss!! I've read all three of them and, being new to the REI game, totally relate with the way you talk about executing your business. Thanks for the guidance!
- 10yForrest HoldenPro MemberInvestor · Duluth, MN · Member since 2015 · 70 posts · 22 votesJoe Villeneuve and Marcus Johnson I believe that to invest diligently requires discipline regardless of whether you practice the Kung Fu of Ramsey or Kiyosaki...
- 7yGail LongeneckerPro MemberMember since 2018 · 7 posts · 0 votes
DR has an amazing process. I'm an FPU instructor and the feeling of being free from the weight of debt is so foreign to my students. It takes a blink of any eye to wander into debt and years and years of being a slave to get out of it. This applies to REI so go into deals with your eyes wide open and a very conservative plan.
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