Hi there BiggerPockets world,
This is my first post here on BP, I’m a newbie/ wanna be investor. I’m working on educating myself on the real estate investing world. I’m posting this to get some advice from the BP world of savvy investors for a question that I haven’t heard anyone else pose yet (if such a post exists please let me know).
(A brief introduction to where I’m coming from) I’ve been following Dave Ramsey’s teachings and have learned a lot and owe my current solid financial footing to his “Baby Steps”. I could go on and on about how he’s helped me make smart financial decisions and so on…
Like I said I’m new to the real estate investing world and BP but I listen to Josh, Brandon and Mindy on my way to and from work each day(via the BP podcast), I hear story after story of how people have gotten into the real estate investing world and been successful. All the stories I’ve heard so far are about taking out loans of some type, either bank, private/ hard money, or friends and family, etc. As I listen to this I think to myself, “What would Dave say to this…?” Then I hear Mr. Ramsey’s voice in the back of my head saying something like this, “The borrower is slave to the lender.” or “100% of homes that are foreclosed on have mortgages…. (paraphrased)”.
So I don’t really have a question so much as I wanted to get a conversation going about how my (soon to be) fellow investors view Mr. Ramsey’s philosophy on life, money and real estate. I’m torn between using some form of a loan vs working hard to aggressively to payoff my current property before acquiring more properties.
I like what Dave says and actually took FPU. I follow his debt free philosophy with the exception of real estate.
"Only properties with mortgages get foreclosed", but most people won't get an investment property without leverage in the first place, so even if they lose the property they are not really worse off than they would have been. That's the worst case scenario.
Many people end up much better off than if they had sat on the sidelines.
I'm going to pay off my house, but will continue using leverage for my investment properties. I will consider myself on baby step 7 once I've paid off my house, even if I still owe money on my apartments.
One final thought on Dave Ramsey is that he says "people who use leverage underestimate risk". That may be true, though he overestimates it to the point that any risk is unacceptable. And THAT is what I find unacceptable.
First off, you'll find a ton of haters on BP. It's amazing how many people mock his financial advice even though he's a multi-millionaire and they're still scraping by.
Dave's advice is solid but it's really designed for personal finance. I wouldn't follow his system of "no debt" to operate a business and I don't know anyone that does. Some of it is applicable (e.g. don't carry credit card debt, keep a safety reserve, etc). Leveraging investment loans is a different story. What I wouldn't do is finance high-risk investments like 100% financing or even 90% financing. I prefer to maintain 25 - 30% equity and ensure a strong cash-flow so I can withstand market fluctuations.
I guess my point is that he provides some basic principles that can apply to a business.
I'm a hybryd of Dave and Kyosaki. I used FPU and Dave's debt snowball plan to eliminate $87k of consumer debt, but after I had purchased 35 units or so.
I just met Dave while on vacation in December. Nice guy that has helped millions stop being stupid with money and consumer debt.
But, I often wonder why he doesn't ask about net worth when people do their debt free scream? Most are clawing back up to zero or with a paid off house, so a couple hundred grand maybe.
I paid off 19 units last year, but could never have done anything close to that saving up and paying cash for everything. I may have 2 houses. Even he says the rentals don't really start rolling until 5. That would put me 22 years in! What will prices be then? Appreciation far exceeds savings rates.
Dave went broke back in the 80s using callable loans. The fixed rate 30yr residential loans available now don't carry nearly that amount of risk. Use wisely, but use it if you don't want to be punching a time clock til you're in your 60s.
Welcome to BP, Nathan!
Nathan, My wife and I do this a bit differently than most, at least so far. We have built a nice portfolio of single family rentals that we purchased and rehabbed with cash. I'm not in any way saying that what we did was the best way but it was the way we chose and that we feel comfortable with. We took a bit of cash and bought and rehabbed some pretty rough stuff to get them rent able. We are currently purchasing 2-3 projects a year using all the rental proceeds and extra income from jobs to expand the portfolio as time and cash flow allow. It probably would have been much quicker to leverage our way to this level but we feel good about what we have done and will continue to expand as cash flow allows. I guess my point is that whatever you feel good with can be made to work. Pick a action plan and roll!
@Nathan McQueen I'm a big fan of Dave Ramsey. Dave's primary audience is the 70% of Americans that live paycheck to paycheck and the 63% that cannot write a check for $1,000, according to Fox Business. Dave is a real estate investor and a majority of his wealth is in real estate, however he doesn't teach REI. He teaches basic fundamentals that everybody should know. Credit cards, Car payments, and student loans are financial killers. Where I part ways with Dave is that borrowing money, especially short term, to buy a cash flowing asset is a calculated risk that benefits those who do it wisely.
Welcome to BP! I'm a FPU Coordinator that has followed Dave's principles for over a decade. My wife and I have paid off all of our consumer debt and even our personal residence last year. We even topped it off with our Debt Free Scream live in Nashville. So, to say the least, I'm a huge Dave Ramsey fan.
Like you, I struggle with the idea of "good debt" that you hear a lot about on BP. I've been very skeptical of the risk of leveraging but I'm trying to learn as much as I can about it. Heck, investing in mutual funds is risky too especially when you factor in all the fees and taxes associated with them. I've personally done pretty good with my mutual fund investing, but I recently heard Dave tell a millionaire on his show that he can't make his own mutual funds keep up with his real estate investments.
Another concern I have like Steve Vaughan mentioned above is how long it will take to pay cash for rental properties. I believe Dave (after bankruptcy) built up his business side to be able to pay cash for all of his real estate investments.
Dave's teachings should have put you in a great place to start your investing.
If you haven't read it yet, I recommend reading Rich Dad Poor Dad by Robert Kyosaki. It has really opened my eyes to the opportunities ahead in what I consider Baby Step 7.
I think Dave has some really great things to say about personal finance and savings which is different than operating a business. One of the tools I use on a weekly basis is the envelope system with CapitalOne360. CapitalOne360 will let you open up to 15 different savings accounts which my wife and I use for vacation, home expenses, emergency fund, etc. It is an easy way to organize future spending.
I think Dave Ramsey has some fantastic advice about personal finances and how to get out of debt. I also understand that his audience is the "average American" who has a lot of debt, can't figure out a monthly budget, and isn't even dreaming of investing in real estate.
He talks strongly about debt to drive home to his audience that it's bad, no matter what, because basically they can not responsibly handle debt.
When you have a true handle on your finances and an interest in real estate, your mind sees opportunities with debt. And to clarify, not only is real estate typically "good debt", in my opinion, it's almost always only good debt if that property is not costing you any money out of pocket every month. In other words, assuming it's a rental, the rental income from your tenants should be covering every single expense plus extra (cash flow) each month.
Saving up to purchase property all cash will be the extremely slow game for most people. Using the right loan can help you purchase property faster as it cash flows and grows in equity and value, letting you more quickly roll into more properties.
@Nathan McQueen DR is a good start and has some good rules to live by; especially if you just want to be average. If you want to be truly wealthy I recommend reading Kiyosaki until you completely understand how the rich use debt and taxes.
I refer people who have so much consumer debt (relative to income) that they can't get a normal mortgage to DR all the time. He's extreme, but for some people that is just the right medicine.
The two things he takes too far for my purposes are the anti-30YF-mortgage thing, and the "it's good not to have a FICO score" thing (it's certainly NOT good for me as the guy who must tell you the interest rate if you don't have a FICO score!), but fortunately there are 10 million threads on the internet just like this one, where the consensus is that this is taking it too far, that people will find of their own accord.... kind of like how most religious people aren't full blown celibate priests or monks that take vows of silence, but if you want to go all the way then you know the options (you CAN become a priest or take a vow of silence, if you wish, but for most people this isn't the right fit).
@Nathan McQueen , that's a great question. You'll find several "Dave Ramsey v Kiyosaki/Cardone/etc" threads on BP, but here's my take:
1) I'm a big Dave Ramsey fan. I've been an ELP for tax services for 7 years and the CPA that works for me is a Ramsey Solutions Master Financial Coach.
2) Dave's advice is tremendous for getting people out of debt, prioritizing savings and investing, and thinking long term.
3) I differ with him on the purchase of investment property. Dave would say to save up money and pay cash. It would have taken me a decade to save up for the purchase price and improvements on my commercial building. In the meantime, the price would have gone up considerably and it would no longer be for sale. So I used debt.
But my purchase of investment properties is "Ramsey-ish" in that I put down 20% on a 20 year note and will do the same on my future REI purchases.
Hope that helps!
It really does not make any difference which guru you follow since thheyhave all been successful with their method. This of course does not mean anyone else will be successful following it. Many,maybe most will fail miserably. The reason being that circumstances vary and are 100% not predictable.
Every system works, not everyone has the ability to be successful regardless of your chosen guru formula.
@Nathan McQueen My personal perspective is that most of the guru's do have some useful nuggets. The trouble is that you can't have a one-size fits all solution and then apply it to yourself. Well, okay, you can but I would recommend it. Just because you like Rich Dad, Poor Dad you don't have to embrace Kiyosaki's new pitches for gold, silver, etc. But it's nice to have the easy to glean messages about an asset vs. liability. You could say the same thing about Susan Orman on her old show and probably about another 20 real estate guru's.
And you won't even get agreement here on BP. Some of the people will yell "LEVERAGE TO THE MAX!" from the highest hilltops. Others will say to keep a reasonable (defined by each individual) amount of debt on your property. Some will say that buying $35K properties for "massive returns" is great while people like me wouldn't touch them.
And don't even get me started on the implications of tax brackets, marginal income tax, personal income tax states vs. not, etc. Some of the overarching themes are nice, some love inspiration, but I don't think there's any prepackaged plan that would apply to you, Nathan, and me equally.
Wow, thanks everyone for the advice! I'm glad to see there are some fellow Ramsey followers out there. To those of you that recommended I read Rich Dad Poor Dad, I'm in the middle of it right now!
Thanks again everyone on the warm welcome to BP!
Dave Ramsey offers good personal finance advice to those who are bad at personal finance.
You should not apply personal finance advice to business. Real estate is a business. Those who do not treat it as such, fail at it.
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