Is Dave Ramsey correct? Anyone still around after 10 years?

Buying & Selling Real Estate
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Is Dave Ramsey correct? Anyone still around after 10 years?

Wade Kulesa
Member since 2020 · 22 posts · 82 votes

I've been on the Dave Ramsey bandwagon for the last several years. His advice definitely worked to get us out of debt and allow us to save a pile of cash. But as I look to get more into real estate investing, there's basically 2 schools of thought; use debt and finance everything or pay cash. While I feel I'd be fairly comfortable financing (assuming the numbers work), one thing from Ramsey is still ringing in my head. He says there are no real estate investors that borrow money to do so that are still around 10 years after they begin their journey. My plan is to do this for at least the next 10 years, so the main question is this: is dave ramsey correct? How many investors on here would disagree with his assumption and if so, why? Open to all views. Thanks in advance for your input.

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Joseph CacciapagliaBusiness Member
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
6y

That's a completely untrue statement. I know plenty of investors that have been in this business several decades, and the vast majority use debt. I've been investing since 2005 and always use a mortgage. The ability to obtain very attractive financing is one of the main benefits of real estate investing. If you are leveraged to the hilt and have no cash reserves, that's another story.

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y

    "He says there are no real estate investors that borrow money to do so that are still around 10 years after they begin their journey. "


    Well, if Mr Ramsey said that, then I call BS.  Almost every investor of any size uses the leverage of OPM.

    I understand Mr Ramsey is going after the 80% that abuse/misuse credit and dig a hole.  For those people, cold turkey is probably best.

    However, if you can borrow a dollar at x% and invest it and make >>x% why wouldn't you?

    1Reply
  • Nat C.
    Investor · Miami, FL · Member since 2013 · 807 posts · 475 votes
    6y

    @Wade Kulesa

    I have never read or listened to Dave Ramsey but I’d suggest you change your mentor and start reading and listening to Robert Kiyosaki.

    The man is all about using debt and he’s wildly successful and I think he’s been around half a century.

    4Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    6y

    Simply put, it’s hard to scale without leverage.

    I bought my first property in 2010 for 94k. I got a mortgage on it for just over 70k. I rented it out for $900 a month and I cash flowed a little over $100 a month. I kept it for 5 years and then sold it for 168k. With the money from this property I went through a year-long real estate education program. I now have about 100x as much debt and 100x the amount of equity. 

    For me using debt worked. IfI had waited to buy my first house in cash I might own 2 cheap properties today. I’m glad that I learned how to use leverage wisely.

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  • Account Closed
    Professional · Canton, MI · Member since 2016 · 296 posts · 230 votes
    6y

    @Wade Kulesa I'm a fan of his but he often overstated things a bit to make a point. If you're at 50% LTV on all your properties, you're gonna be fine. But he's on talk radio and he's not going to spend 20 minutes with a caller about having a conservative LTV, keeping cash reserves, etc. he's usually talking to broke people so he's just gonna say "don't do it".

    1Reply
  • Russell CazeaultPro Member
    Contractor · Osterville, MA · Member since 2018 · 41 posts · 30 votes
    6y

    @Wade Kulesa keep in mind that Dave Ramsey is a business as well and he wants to keep you 100% in his camp. Like any well educated person, the key is to read and collect info from multiple sources and form your own opinion. Obviously his advise has served you well so far, but the best solution in my opinion is somewhere in the middle.

    3Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @Mike Dymski:

    There is a 3rd school of thought...modest/prudent leverage.  Most investors are not max debt or no debt...they fall somewhere in between.

    Totally agree, Mike. 

    Every opportunity is case by case.  Too many repairs?  Cash.  Odd property? Cash? 

    Tired landlord that likes the monthly and paid it off years ago?  Seller financing. 

    15 yr, 30 yr, sub2?  Depends on rate and seller debt level. 

    Wrap, lease option, private money?  It's the flexibility and ability to pivot that makes RE so attractive.

    If you want to do cash only, pay retail and not add value,  buy mutual funds or something.  Taking away leverage and the ability to buy under market value removes 2 main reasons to buy an illiquid and problematic asset class.  

    8Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    I have many clients who are still around doing this 10 years later. Several of them have 5 million+ net worth now. I only have one client who buys cash and been doing it 10+ years, he has family money inherited so it's a very different situation to the typical real estate investor. 

    Investing in real estate cash is a very poor risk adjusted return in my opinion. Any safe non headache area is going to be selling at the most a 7 cap meaning 7% annual return if you pay all cash and typically more like a 5-6% cap rate. You can get 8-10% with less risk in stocks. By financing 25% down you get much higher returns. 8+% COC, 5+% mortgage paydown, 10% in appreciation based on the down payment amount. It adds up to being over 20% total returns which is a proper risk adjusted return.

    3Reply
  • John Edwards
    Rental Property Investor · Topeka, KS · Member since 2017 · 56 posts · 137 votes
    6y

    @Eric James that’s just not true. You can make greater-than-market returns (8+ percent) easily with paid-for real estate. Hardly something to sniff at.

    0Reply
  • Mark Van
    Los Angeles · Member since 2020 · 2 posts · 1 vote
    6y

    @Sylvia B.

    Great way to understand both sides...

    1Reply
  • Nicholas Preston
    Rental Property Investor · Danville, VA · Member since 2017 · 30 posts · 18 votes
    6y

    Investing isn’t taught in school and neither is currency or debt, so for most people it’s fine advice. For the ones of us who take initiative and learn about passive income and the freedom it can bring to our families this maybe terrible advice. I think Ramsey was way over leveraged early in life and lost everything, still has a grudge with debt. He also makes a killing selling books and other things about it. If the numbers work then the numbers work, with debt or without. I want to scale so I take in the debt with a decent amount of reserves. I also cashed in my 401k to buy my first rental property which most people wouldn’t agree with. That allowed me to start brrrring. Smartest thing I have ever done, besides marrying my wife of course!!

    6Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y

    Dave is helpful for people who need to get out of a debt hole and get their spending in order, and that's where it stops.

    Unfortunately, his real estate investing advice is pretty consistently off the mark. Debt is a critical tool for real estate investors, big and small. He has never really given good details on his "failure" in real estate, but all indications are that he was not using a particularly established or reliable real estate investing strategy.

    3Reply
  • Miguel Ochoa
    Investor · Hercules, CA · Member since 2016 · 32 posts · 4 votes
    6y

    @Wade Kulesa I struggle with this as well, but one option that you have not mentioned is partnering up with someone who can pay all cash. This way your not in debt, property is free and clear if it’s a flip or buy and hold. Just have to find a win win for all parties involved.

    0Reply
  • Dave SpoonerPro Member
    Rental Property Investor · Cincinnati, OH · Member since 2020 · 870 posts · 823 votes
    6y

    Taking on leverage increases risk, but it also amplifies potential profit. Like others have noted, it's truly a case-by-case basis. Every investment should be a balance between acceptable risk and target return.

    Paying cash eliminates a tremendous amount of risk, but it also limits your return. Ignoring leverage severely limits your opportunities for growth.

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    0Reply
  • Gary L Wallman
    Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes
    6y
    Originally posted by @Eric James:

    Returns are so low on cash purchases of RE they really aren't worth it. To make decent returns you need to use financing, but be careful about being stretched too thin and not be able to survive a downturn.

     Eric,

    Not sure how returns are going to be higher on leveraged properties unless you are banking on unknown appreciation. Something we don't do in the Midwest. Cash purchases typically save you tons of money in interest, closing costs and , of course, the ability to negotiate for a far better purchase price going in.

    When my bank pays $16 bucks a month interest on 200k in a money market account and 2 100k rentals net 18k in cash flow ( a return of 9% cash on cash) I'm not sure how you can say it's not worth it.

    Respectfully,

    Gary

    5Reply
  • Victor Ong
    Developer · Los Angeles, CA · Member since 2020 · 90 posts · 50 votes
    6y

    I think we need to examine the balance sheet closely to understand what type of debt and why use debt. The key to manage debt is duration: how to match your debt duration with your cashflow. I am going to borrow Gordon Gecko’s famous quote with a twist:

    Debt for a lack of better word is good...

    For personal debt with short term maturity such as credit card (revolving credit), has the following nature:

    Current Liability

    1. Short maturity - due in 30 days or less

    2. 0% interest rate within 30 days or less

    3. High interest once you roll it over into balance

    4. Convenient payment solution with traceability

    In most situation, you would use CC as your recurring expenses that you can pay it off on your monthly income/cashflow.

    Fixed Liability

    For mortgage debt that has a long term maturity (25-30years), it helps to alleviate your cash outlay if you use it right. This is where debt becomes beautiful:

    1. Allows you to take control of a potentially appreciating asset with possible of cash flow

    2. If debt’s interest rate does not catch up with inflation, then lender loses money. Imagine if you have a mortgage rate at 3% and annual inflation rate is 2%, lender only makes a 1% spread, while your asset appreciates 2% per year. Your holding cost is simply 1% without factoring principle repayment and cash flow generated from the rental

    If you are able to manage the duration well, then piling debt is not burdensome. A lot of RE investors piled on debt without cashflow to suffice the debt obligation in order to bet on huge appreciation, which is gambling. You are better off betting #36 on the roulette table.

    Again, think about all the sovereign debts for the moment. They never pay back the principal but kept refinancing it while they print more fiat money to create inflation. The more inflation they created, the cheaper their debt would be.

    0Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    Robert Kiyosaki (ala Rich Dad Poor Dad fame) puts it very wisely - (paraphrased): Debt used for the generation of cash flow  - that covers the payments on the debt itself, is a good form of debt.  Debt to buy things that don't generate cash flow is to be avoided (bad debt).  I think Robert and Dave Ramsey might probably agree if put to that specific point.

    In his book, Robert speaks of wanting to by some personal (depreciating) asset -like a car - the response from his wife was he had to go and buy a property that would pay for the asset.

    Personally, we are happily heavily leveraged (paying mortgages on 19 properties a month!)... all on income producing assets - with the exception of our own house.  Reaping the tax write-offs, appreciation, and tenant paid mortgage pay downs along the way.  

    Other side benefits mentioned in Robert's book is that you are much less 'attractive' to lawyers if there is debt tied to your properties.  They give the appearance to not having much liquid value if you were to be sued.

    3Reply
  • Account Closed
    Member since 2020 · 3 posts · 1 vote
    6y

    @Wade Kulesa

    Thanks for this post.

    I have been in REI since 1992 (my parents since the 80's). Went through a down turn with them in 1987 and myself in 2007.

    Discovered Robert kiyosaki in 2000 and Dave Ramsey in 2010. I use Dave Ramsey’s info on the personal side (a little in my business) and Robert Kiyosaki in my business (some in my personal).

    1Reply
  • Account Closed
    Member since 2020 · 3 posts · 1 vote
    6y

    @Wade Kulesa

    I believe Ron LaGrande has moved away from Loans (only doing subject to deals).

    0Reply
  • Shane H.
    Member since 2018 · 433 posts · 208 votes
    6y

    @Wade Kulesa

    One correction before I read through all the answers. He says no one he knew who did 100% financing is around in ten years. He's qualified even that at times by saying. Maybe 1 or 2 but most have gone under. A lot of specifics there. 100% financing. How many people are truly working 100% financed deals? That he knew. How many did he know that tried? Okay one or two. Again... Out of how many?

    0Reply
  • Jim Genis
    Investor · Olathe, KS · Member since 2014 · 88 posts · 58 votes
    6y
    Originally posted by @Mike Dymski:

    There is a 3rd school of thought...modest/prudent leverage.  Most investors are not max debt or no debt...they fall somewhere in between.

    I agree with Mike on prudent leverage. I used some Ramsey principles to help with debt management on the personal side. For RE, I've been investing (flipping, BRRRR, and turnkey) for 16 years and I've consistently use leverage. That said, I admit that there were instances where my leverage (frequently 100% on flips) was too high. I've not lost money on a RE deal but I've had a couple of pretty thin ones; if the market took a sharp dive, I'd have been underwater. My view moving forward is to:

    1. Leave for at least 25% equity in any deal -- buy low enough or put the cash down. This protects you.
    2. Snowball mortgage payments to pay off properties faster. This can quadruple your cash flow.
    3. Take the slow path: don't buy unless it's really good. One great deal a year is just fine (as I do have a day job).

    At the end of the day, you paid off your debt and you should be proud of that. You want peace of mind. Over-leveraging creates stress. But leverage is great for RE investing as long as you're smart about it. Keep that peace of mind... it's precious!

    Jim

    3Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    6y
    Originally posted by @Gary L Wallman:
    Originally posted by @Eric James:

    Returns are so low on cash purchases of RE they really aren't worth it. To make decent returns you need to use financing, but be careful about being stretched too thin and not be able to survive a downturn.

     Eric,

    Not sure how returns are going to be higher on leveraged properties unless you are banking on unknown appreciation. Something we don't do in the Midwest. Cash purchases typically save you tons of money in interest, closing costs and , of course, the ability to negotiate for a far better purchase price going in.

    When my bank pays $16 bucks a month interest on 200k in a money market account and 2 100k rentals net 18k in cash flow ( a return of 9% cash on cash) I'm not sure how you can say it's not worth it.

    Respectfully,

    Gary

    There is truly something to be said for earning a tax-friendly 9% with very little risk...and I totally get what you are doing. But just for the sake of continuing the discussion at hand, why would you assume putting any additional freed up cash into a money market fund? That's not an apples to apples comparison. The whole point of financing is to create opportunities to buy additional properties (or even your first property). In your case, since your two properties blow the 1% measurement out of the water, your COC would be well into double-digits if you implemented some well-executed delayed financing and find additional deals with those return parameters....especially when you consider how low mortgage rates are right now.

    Heck, even here in a city that's not known for its cash flow (Los Angeles) I am able to get well over 9% COC by financing my purchases.

    0Reply
  • Shane H.
    Member since 2018 · 433 posts · 208 votes
    6y

    @Wade Kulesa

    On to the meat and potatoes. Dave Ramsey invests in real estate like it's a hobby. He didn't make his living in real estate. Well. As a broker at times, but not as an investor. His fortune was made from his business. He then essentially stores his wealth in real estate. He regularly says, "I love real estate. I own tons of it. I pay all cash for it." Think, "I love beanie babies. I have tons of them. I buy them with my spare change!" If you follow his steps, beyond step 3 and don't have an extraordinarily high income. You may never get to own any real estate. Or very little at best.

    Let's assume an average 24 year old with 30k in debt. And making 40k per year. Assuming beans and rice. Step 2. 2 years. Step 3 1 year. Step 3b. 2 years. Now your 30 and buying your first home. Steps 4,5,6... Half your income gone. To retirement accounts you may not live to use, and a home mortgage. Let's say you're making 50k by this point. Saving maybe 10k/yr for real estate. Paying cash. You'll be 40 before you buy your first income property. And it may make you an extra 10k/yr. If you reinvest every penny you'll be able to buy your next one in 5.

    That's nuts. That's not a business model. That's a hobby. For Dave he can buy them whenever he wants because he has tons of money. If you're a car guy it's like Jay Leno telling you not to buy a classic car until you can afford to pay to have a total restoration done on it. Easy for him to say...

    Note that you've also never heard him talk about retiring off that income, or living off of it in any way. He thinks everyone should work until they're 70! Well I guess if you intend to work until you're 70, and just want to own real estate as a hobby, waiting until you're 45 to pay cash for a sfh is a viable option. 🤷🏼‍♂️

    2Reply
  • Michael Hudson
    Investor · Madisonville, LA · Member since 2017 · 18 posts · 6 votes
    6y

    @Wade Kulesa

    0Reply
  • Michael Hudson
    Investor · Madisonville, LA · Member since 2017 · 18 posts · 6 votes
    6y

    @Wade Kulesa

    I like Dave Ramsay's rules for my personal finances, and Robert Kiyosaki's rules for my business finances.

    3Reply
  • Reginald Ross
    Rental Property Investor · Gulf Shores, AL · Member since 2019 · 107 posts · 115 votes
    6y

    @Wade Kulesa

    Dave Ramsey couldn’t be more wrong on this. I suspect his actual reason for saying this is to divert attention away from real estate because his advice doesn’t apply at all to the sector.

    His advice keeps people out of debt but it also keeps them poor or at least severely limits their wealth.

    0Reply
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