Dave Ramsey is a Genius now

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

6y

Dave Ramsey's plan works well if you inherited a bunch of money or have a really high paying job. I could not have gotten to where I am today without debt. I was able to start with $25k ish and turn that into millions in net worth and quit my job, only because of leverage.

It's not an all or nothing. It's a be smart about the debt you are taking. Make sure you have good LTV and more importantly a good DSCR. Being able to pay your debt service at the end of the day is the most important. Most of my properties are at or above a 2.0 DSCR (NOI is double the mortgage payment), which means I sleep well at night.

4 Reply

Shiva Bhaskar

Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes

6y

I think there are plenty of people out there who get trapped in a bad cycle with consumer debt, and could really benefit from DR's advice. Most of these folks, unless they have a major change in mindset, aren't likely to have much appetite for or interest in real estate investing. They could really use DR's tips around not overleveraging.

However, I think for most investors, some level of debt is neccessary, unless you're a very high earner in a pretty cheap area. Managing that debt in a smart way is key.

I know a lot of folks who don't like to go above 70% of purchase price in leverage (some stay closer to 65%), on investment properties. These people will probably be able to weather a storm better than many, especially if they buy value add properties. However, other people go much higher leverage and get burned - which isn't smart. As with most things in life, being educated as to risks, and doing things in moderation, is usually a good idea.

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Dylan H.

Rental Property Investor · Savannah, GA · Member since 2018 · 174 posts · 129 votes

6y

@Sylvia B. Definitely happy to assume responsibility for a mortgage and the risks it involves. Foreclosure, credit impacts, etc. But you’re saying it’s a lie that tenants pay peoples mortgages on investment properties? Do you know what the 1% rule is? The majority of what you’re saying has little distance between a leverage and non leveraged property. If you don’t pay property taxes, you’ll lose your property just as well. So I guess we just shouldn’t invest in real estate, it’s risky and there’s a chance in losing it? A person with or without a mortgage on a investment property are in the Exact same situation if they have the exact same amount of expense reserves(percentage wise of all expenses with or without a mortgage) as far as risk goes.

You said not to spread “lies”, and you’re saying paid off properties are “king.” Can you not admit that’s an opinion of yours and not a fact? If you can’t do that I’d highly recommend you broaden your horizons. Maybe read Tax Free Wealth by Tom Wheelright, and listen to a few podcasts about “growth mindset” on Get Rich Education. I can DM you some specific episodes if you’re interested.

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John Collins

Investor · Tx, GA · Member since 2019 · 313 posts · 337 votes

6y

These kind of absolute I found the holy grail path posts are so naive and cringeworthy. I rose out of poverty because I did nothing but work for 10 years and save (whilst never living on my own or having kids), then put that money into different properties totaling around 1.6 mil at the time.

If I had used it to buy only 1 source of rental income, "straight cash homie", I would have never been able to scale and take advantage of the opportunities I had at that moment. And as a result, I am absolutely prepared for Corona although my portfolio consists of more high end rentals who aren't going to stop paying or be affected (in the short term... we'll all take a hit from one source or the other over the next 18 months)

2 Reply

Matthew McNeil

Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

6y

Originally posted by @Marcus Johnson:

I've been a hardcore follower of Dave Ramsey and have done his Debt Snowball in the past and it was very rewarding. The problem was that I started to veer in the past 4 years and take on more debt such as buying a Lake Property that I run as an airbnb. Although the Airbnb has been quite successful, I"ve noticed that I don't sleep as well as I used to because I'm leveraged. I know a lot of people have been struggling with Airbnb during Covid-19 because their properties rely on tourism and now that that's buried, I feel for those property owners that are taking losses right now. The reason mine is successful during this trying time is because it's on a private drive, in a rural area that is very desirable for people from the Twin Cities looking to get a way from the big crowds and bright lights. I get a lot of people from Wisconsin, Iowa and south Dakota for both work purposes and vacations. I was lucky and was able to get two workers that are staying for almost 3 months. All this being said, I'm no longer interested in this business, because it takes up a lot of time and the money isn't worth it, nor is the stress of having to deal with the business. I have a lot of equity in the property, but we have it listed and have a potential buyer that is making a decision hopefully today from what their agent said.

Anyways, what I"m trying to say is now I understand why Dave Ramsey is a genious. During these times, can you imagine that if you owned your properties free and clear, and had a large emergency fun for each property, you'd be sleeping at night quite well. Having zero debt is king. No one ever expected this would happen (Covid-19) and there are tons of renters who have been laid off that won't be making their rent payments and guess what? As an owner and landlord you still have to pay your mortgage, taxes, insurance and 50% maintenance fees. If you owned free and clear you wouldn' t have any mortgage payments. How lovely that would be.

So I'm really hoping that the lake property sells today or soon and my plan is to start paying off my primary home first and then start working on our duplex. Once those are free and clear, then I will start saving to buy another rental property with cash. I've been alive for the S&L in 87 debacle, the tech bust in 2001, the housing crash in 2008 and now this one. So this is my plan and thanks Dave for all that you do.

A new phrase on BP: "Having zero debt is king."

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Preston Quinn

Rental Property Investor · Lynchburg, VA · Member since 2018 · 116 posts · 73 votes

6y

@Llewelyn A.

Well said, this is pretty much what I am doing. Full time construction in early 2000s. Laid off. Back to school. Machinist full time. Achieved top pay in 3 years. Started construction company. Sub everything out. Making decent money for side hustle. Introduced real estate to my life. Have 4 doors now and looking for more with some cash stashed back to get through this. My life is hectic. But I love the crazy.

1 Reply

Kanwar Sodhi

Real Estate Agent · Chantilly, VA · Member since 2016 · 245 posts · 61 votes

6y

Positive Debt vs Negative Debt

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Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

6y

The DR approach is great for your average household with consumer debt; it is not meant as advice for a business - such as owning and operating a portfolio of rental properties.

Zero debt is not king; you can have zero debt and loose your property to tax forclosure.

A healthy business is king.

We have a good amount of rental property debt and I sleep very well, even in times of CV. Why? Because we have a very healthy chunk of equity, properties in excellent condition, strong cash flow and a good amount of reserves. We have multiple layers of fallback options.

It's a little bit like running from a bear; you don't have to be faster than the bear, you just have to be faster than some of your friends. In terms of a real estate portfolio, the question always is: how resiliant is your beusiness in comparison to the average benchmark.

If your business is financially more resilliant than the average, by the time you default, it does not really matter anymore - at that point my friend with the 12 months of canned beans in his basement was right.

6 Reply

Sylvia B.

Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes

6y

Originally posted by @Dylan H.:

@Sylvia B. Definitely happy to assume responsibility for a mortgage and the risks it involves. Foreclosure, credit impacts, etc. But you’re saying it’s a lie that tenants pay peoples mortgages on investment properties? Do you know what the 1% rule is? The majority of what you’re saying has little distance between a leverage and non leveraged property. If you don’t pay property taxes, you’ll lose your property just as well. So I guess we just shouldn’t invest in real estate, it’s risky and there’s a chance in losing it? A person with or without a mortgage on a investment property are in the Exact same situation if they have the exact same amount of expense reserves(percentage wise of all expenses with or without a mortgage) as far as risk goes.

You said not to spread “lies”, and you’re saying paid off properties are “king.” Can you not admit that’s an opinion of yours and not a fact? If you can’t do that I’d highly recommend you broaden your horizons. Maybe read Tax Free Wealth by Tom Wheelright, and listen to a few podcasts about “growth mindset” on Get Rich Education. I can DM you some specific episodes if you’re interested.

Dylan, you are replying to/arguing with all kinds of statements I am not making. I have made no comment about the wisdom of or need for using leverage. I have not said paid off properties are king. The only thing I am saying is that the statement "your tenants pay your mortgage" is a lie.

If your tenants pay your mortgage, then it really doesn't matter what the rate or terms are. If you are choosing between lenders, one offering 3% and the other 6%, with all other terms the same, which will you choose? Will you choose the loan at 3% to save your tenants money or to save you money?

Do your tenants pay your property taxes? If so, it doesn't matter whether you live in a state with high or low property tax. The tenant pays the taxes!

Do they pay your maintenance and cap ex expenses? When replacing that kitchen faucet, it doesn't matter if you buy the $700 one or the $50 one. The tenant is paying!

All of these are your expenses, not your tenants'. If the expenses are higher, then less money stays in your pocket. You might choose for very good reasons to buy a property with high taxes, or to put high end fixtures in your rental, or to pay for a loan, but don't fall for the lie that the tenant is paying for it.

2 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

6y

@Marcus Johnson. Read my post again, more carefully this time. I was specifically responding to you about how Ramsey looks like a genius these past few weeks. I actually followed the DR philosophy about 70% of the way. Then we needed to part ways, as I saw an opportunity for real estate investing using the power of leverage (not just cash). Ramsey's book; "The Total Money Makeover" is a good read if you are in way over your head and cannot seem to get to even. However, most of us on BP realize that "cash and only cash" is a silly philosophy. And, if Ramsey is a genius this month, ergo, he must have been a moron the past 10 years. Obviously, neither one is exactly true.

0 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

6y

@Joe Splitrock. Wellllllll..........your post is a little simplified on the Dave Ramsey method. I think where most of us split with Ramsey is his absolutely 100% insistence on NEVER taking out a loan. Most of us would never be as successful as we are without leverage. I might still be renting if I waited to save $200k+ cash. And my retirement account would surely be lower, as I would have needed more cash to purchase real estate. If you have managed to purchase all your properties with cash, and are happy with that, then that is fantastic.

1 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

6y

@Marcus Johnson Is this what you do on this site, is make fun of people and bash them for making a family decision to sell a cabin we no longer want. Wow, I didn't know you control my life decisions. Wouldn't you think if it was the money I cared about only, I would want to keep this money making machine. I care more about my time with my family and I hate debt. You obviously ddin't know I have a very successful duplex in South Minneapolis that has been a cash cow and the LTV is 40%. I guess that's because I don't have it for real estate investing.

////////////////

At no point was I making fun of you. I specifically wished you well in selling your cabin. Was it the; "real estate investing is not for everyone" part? That isn't making fun either. Your original post seemed like you didn't like the stress from owning real estate and needed to get out. That happens, and I wished you well. Was it the dig at "if ramsey is a genius now he has been an idiot most of the last 200 years"? Again, no dig on you. You gave a single anecdote and I pointed out owning real estate has been the #1 wealth tool in the nation, since we have been a nation.

Sorry if I offended you. We all have our ways to wealth, and you are on a real estate website.

1 Reply

Marcus Johnson

OP

Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes

6y

Believe me I get why people use leverage to gain wealth, it’s just the risk side of things that scare me. I used leverage to gain my wealth so I would be a hypocrite to say I didn’t use it effectively. It’s just right now I want to eliminate debt and then we’ll see where it goes from there. For my family that’s the path we’re taking.

0 Reply

Fred Cannon

Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes

6y

@Marcus Johnson

I have always tried to be mortgage free. I think having a couple of partners and each kicking in a third is better than a third down and being partner with the bank I have 8 properties and only one mortgage on my original home that is now a rental. I also have a partner on 3 of the rentals

Investigate one bedroom condos in an area with good demand. Less cost less maintenance and around 12-15% return after all the bills are paid .

0 Reply

Joe Scaparra

Investor · Austin, TX · Member since 2013 · 662 posts · 1k+ votes

6y

@Dylan H. and @Syliva B. both of you seem to be arguing over semantics...no. Buy Cash or use leverage, which is better. It depends on each situation...no? When I started accumulating properties I used leverage. As I approached enough, I started concentrating on paying off the loans with the profits the portfolio was generation. I didn't need the profits to live off as I had a good job. Now at 64, they are all paid off and if I buy any additional properties, I usually pay with cash, but I am not too interested in acquiring more as I own 19 doors and manage another 6 for my kids. Now I have quit my job and my income from my properties are a major source of income for me. Having my properties paid off give me a lot of financial flexibility. If I am in the accumulation mode, using leverage is beneficial but in the mature portfolio mode with the objective to maximize disposable income, for me having them paid off is ideal.

Don't get caught up as to who is paying the mortgage....tenants or you? Come on that is silly because you're both right! Technically the owner is ultimately responsible for all the bills......got it. But because the owner was smart, he bought a property that generates enough cash flow to pay all the expenses and has money (profit) left over. He uses the rent payments to pay the expenses. Come on, is this concept really worth arguing about.

Suppose your grandfather told you as you entered your freshman year in college that when you graduate he will pay half the cost of a new car of your choosing as long as you pay the other half in cash. His goal was to get you started with no debt out of college with a new car. That meant that you had to work during your 4 years of college to pay your half in cash. You graduate and buy a $50,000 car. You paid $25,000 and your grandfather paid $25,000. You don't even have a job yet, but you drive the car to your friends house. He is quite amazed and ask you, how much did you pay for this car. Had you said $25,000 or $50,000 would be right ......no? Cheers.

4 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

6y

Interesting discussion.

I fall somewhere in the muddy middle. I bought and own most of my properties outright. I have some leverage on a few of them (nowhere near 75-80% LTV on any of those).

Thoughts:

1. Using leverage is usually required at some point because we are all mortal. If everyone was immortal, then it wouldn't make any appreciable difference in the long run if you used leverage or not, but since we are all limited by time as to how much we can grow it tends to be a necessary tool. This is not just for rental properties but really for virtually all business.

2. You never completely own your properties. At a minimum you will always owe property tax. Most sane people will also always owe property insurance. So to some extent your property is mortgaged forever. The only real difference is the span between those costs and the added cost of borrowed money.

3. Having no debt definitely allows you to scale back in bad times. I can rent most of my homes for ridiculous cheap prices because I don't have to pay a bank.

4. Having leverage is just another notch in the risk=reward scale. You get paid well based on the amount of risk you are willing to take, generally speaking. This is why federally-guaranteed CDs pay .5% if you're lucky, while lots of landlords can make 10-20% annual return on their properties. More risk. All you really need to know is how much risk you are comfortable taking.

5. Dave Ramsey made the bulk of his money selling his product - himself, his show, and his various books and programs. He runs a business. Most successful businesses make more money than parking money in RE, which tends to be the "safe" place that those who have made money somewhere else park some/all of their dollars.

6. Dave Ramsey's advice is good for most Americans. Once you've progressed to a point where you are a serious investor on this board, his advice makes no sense. Financially speaking, for example, paying off your primary home is stupid because of the devaluation of the dollar over time. The main benefit of a fixed mortgage is that you are paying off 1999 debt with 2020 dollars. Paying off 1999 debt with 1999 dollars just locks your money into a vehicle that produces no income.

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JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

6y

Originally posted by @Fred Cannon:

@Marcus Johnson

I have always tried to be mortgage free. I think having a couple of partners and each kicking in a third is better than a third down and being partner with the bank I have 8 properties and only one mortgage on my original home that is now a rental. I also have a partner on 3 of the rentals

Investigate one bedroom condos in an area with good demand. Less cost less maintenance and around 12-15% return after all the bills are paid .

Out of curiosity, why do you think having two equal, vocal partners is better than one silent partner who only expects to get paid and lets you make every other decision?

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Lionel Li

Rental Property Investor · Queens, NY · Member since 2017 · 93 posts · 128 votes

6y

Putting aside his main teachings of budgeting, not getting into consumer debt etc. Dave Ramsey's philosophy of investing in real estate is not for the everyday investor, it's for the asset heavy or super high income earner. He's putting the "cart before the horse" so to speak, where do you get this cash to put 100% down on an investment property when you're just starting off?

Sure let's throw basic economics out the window (inflation/TVM), save cash while your warchest is worth less and less every year, and the property you want to acquire is worth more and more every year. Or let's take a bet that the stock market will always go up 12% on average every year. What if 2020 was finally your year to buy your investment property, should you wait a few more years because..oops?

I tend to not listen to people who have an uncompromising attitude (my way or the highway), and maybe the DR fans are fond of him because of his over-the-top assertiveness. Like a lot of people mentioned, leveraged vs unleveraged investing are different ways of investing..you can't tell us what we're doing is wrong and the DR way is right or genius.

Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it IS stupid. His ways are right for some, but not for me and a whole bunch of us on BP.

2 Reply

Patrick Britton

Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes

6y

DON'T CONFUSE GENIUS FOR BLIND LUCK. C-19 is a black swan if there ever was one. You're not a genius if you're lucky. you're just lucky.

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Joseph CacciapagliaBusiness Member

Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes

6y

@Marcus Johnson one thing that the anti-leverage crowd often misses, is that you're trading leverage risk for diversification risk. If you're able to buy 4 times as many properties with leverage than without, then you are getting significantly more income diversification. In reality, you can buy way more than 4 times the properties, if you're using leverage properly over time. If you're shielding your assets from each other and yourself, then your total actual risk could be lower with multiple leveraged properties than with a single paid off one. I understand that a lot of people are not doing this, and many are also over leveraged. I think there is middle ground that is actually the optimal solution.

I'm also wondering if you considered hiring a property manager for your STR? It seems like managing the business is your main issue, and this would alleviate that. If you're profitable enough to cover the mgmt fee, then it might be a decent option to consider.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

6y

Originally posted by @JD Martin:

Originally posted by @Fred Cannon:

@Marcus Johnson

I have always tried to be mortgage free. I think having a couple of partners and each kicking in a third is better than a third down and being partner with the bank I have 8 properties and only one mortgage on my original home that is now a rental. I also have a partner on 3 of the rentals

Investigate one bedroom condos in an area with good demand. Less cost less maintenance and around 12-15% return after all the bills are paid .

Out of curiosity, why do you think having two equal, vocal partners is better than one silent partner who only expects to get paid and lets you make every other decision?

Just a FWIW comment there is one big MF syndicator i am aware of .. name escapes me at the moment.. but they raise all equity and have no debt.. At the end of the day though as you age as an investor I think retiring debt is the way to go.. and by retirement age to be totally debt free with a balance sheet that is all Assets and no liabilities would be something to strive for. I have bizz partners that have balance sheets like that.. but of course they sold companies and made LOTS of money.. or ran fortune 500 companies as CEO and got huge payouts.

but for us average real estate folks need debt to start.. start to widdle it down and maybe at the end of 40 to 50 years of investing you have everything pretty much paid for.. ??? I like that scenario..

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

6y

@Steve Vaughan I dont know if Steve has checked in on this thread.

But I sure like his thought process on good debt bad debt what to do as you age and mature as an investor regarding debt.

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Matthew Irish-JonesBusiness Member

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

6y

@Marcus Johnson. Dave Ramsey is a genius in a falling market and too conservative in a rising one.

He is certainly the guru of maximizing savings but... there is a ceiling on how much you can save on one lifetime from a W-2 income and enjoy life.

There is reward in taking calculated risk. Lots of people getting hurt right now as landlord which is horrible. If you are over leveraged and don’t have a few months of rent saved up you will be in trouble.

Mitigating risk, saving, and leveraging is the answer. The middle path as the Buddhist say.

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Nora Jensen

Member since 2020 · 5 posts · 4 votes

6y

Wow...people need to step back and realize how rude and snarky they’re becoming. Just plain disrespectful and distasteful. The point of this forum is to help each other, bring wisdom and guidance for the betterment.

Now on to the facts, we can all agree for the most part Dave Ramsey is right. Whether or not for the leveraging aspect, the division occurs. That’s fine, we’re all entitled to an opinion.

In my MBA course, my favorite class was psychology of investing. Everyone takes risks in different ways, and we’re driven financially in different ways as well. With that said, I have friends who are accountants and primarily favor saving and paying off their homes aggressively; flip side, I have entrepreneurial friends who have done quite well leveraging an appropriate means of debt. I have an acquaintance who use to work on Wall Street and lost his job, currently serving jail time over insider trading. Point is, everyone has their own comfort level which is fine, until greed enters the picture.

One reason why DR is against acquiring too much is due to greed; please note nothing wrong with having multiple properties, toys, high wealth, but where is your mind? I agree DR does much justice, since most Americans cannot handle credit. Currently, 60% cannot pay $1,000 unexpected bill and 40% cannot pay $400 unexpected bill. The suicidal rate for poor finances is 13%. Number one reason for divorce is poor finances.

I’m going to say the reason for this post was peace of mind, and grateful that he didn’t over-leverage to get himself in a place he didn’t wanna be considering the current events. That’s the core of DR. Now, I’m not saying you have to agree with DR 100%, but at least give DR and the poster the respect of ensuring Americans are within their scope of financial peace, ensuring a healthy life...

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Jeroh Odafe

Rental Property Investor · Phoenix, AZ · Member since 2019 · 15 posts · 9 votes

6y

If debt is bad like DR says, why then is the whole world government using it? Why on Earth will you advise someone to invest in ira, 401ks etc. Plainly speaking, depending on a 401k for retirement is basically saying you plan on retiring poor.

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Dave Ramsey is a Genius now

Dave Ramsey is a Genius now

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