Ramsey vs Kiyosaki - To borrow, or not to borrow?
Homeowner · Anaheim Hills, CA · Member since 2013 · 6 posts · 8 votes
Ramsey vs Kiyosaki - To borrow, or not to borrow?
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13yMany of these financials EXPERTS often times talk about if you eat salad and be ultra cheap everyday for 30 years you might be a millionaire!
They do not mention you will be miserable for 30 years, the million will not be worth anything close to what it is today because of inflation, etc.
So you followed some guru who got rich off of you selling seminars and books etc. and you got ahead a little bit. That's not really how to build accelerated wealth.
If you have ever listened to Billionaire Richard Branson he takes risks every single day. The difference is they are CALCULATED risks based on research and knowledge to decrease the chances of a bad outcome.
I am a believer in taking INFORMED risks. If you want to be ultra safe your returns will show that as well. What are banks paying out 1 percent if you are lucky?? The whole thing is a joke. People put money in banks for paltry returns when they can be doing much better on their own.
I believe it really is as simple as living below your means and investing the rest and creating a snowball affect. Then when you are bringing in 100,000,150,000 a year or more etc. you can up your lifestyle of living within a comfortable range. I have had some people personally e-mail me and say they make 6 figures a years and haven't saved a dime. Their job could be gone tomorrow and all they have is debt and a bunch of crap they will sell for 15 cents on the dollar when they get desperate for cash. It's sad that finances and credit and saving and compounding are not taught in schools as kids. You have to look for outside sources to get educated.
99 Replies
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes13y
Patrick G.
From the outside without knowing any details of an investment one can classify all debt as risky. I happen to think holding your money in a savings account that makes 1/3 of the inflation rate is risky. My goal is to get rich, not slowly build enough comfort to retire in 30 years.Some may see my strategy as risky because I take all the debt I can handle at low interest rates. I see it just the opposite, the good investor makes his money on the buy. I buy my properties at 20% below market, put 20% down and make repairs that increase value even more. When I rent them I am getting over 20% cash on cash returns and I have a loan to value ratio of 55% or less because I bought them right and put money down. That 20% cash on cash does not account for the 20% I made on the purchase, any appreciation, tax benefits or equity pay down.
Could the market decrease? Yes, but it would have to decrease 50% for me to be in trouble and I still have reserves to cover losses. My market has historically never dropped that much in the sector I am buying in. We don't see the huge increases and subsequent decreases that other markets may see. Even if prices drop 50%, I don't have to sell and I am still cash flowing. My rents would have to drop 60% for me to start losing money every month and I still have reserves to make it through tough times.
If these types of drops happen in my market we are all screwed or my area got nuked. Being scared of debt because it may be risky is a completely foreign idea to me. I don't think investing in Real Estate is risky if you know what you are doing and taking on debt is the easiest way to increase your returns exponentially.
- Abingdon, MD · Member since 2013 · 193 posts · 60 votes13y
Originally posted by Mark Ferguson:
Patrick G.
From the outside without knowing any details of an investment one can classify all debt as risky.Are we still talking about Dave Ramsey here?
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Debt is a risk....
One investor that I know would only do variable rate mortgages, never fixed, because they were lower. that's fine when rates are low but if rates escalate, that could be a problem. Think 1981 when rates for mortgages were 15% to 18% fixed for 30 years.
Another investor that I know bought 32 rental houses. His plan was buy, low fix up, refi and cash out. He refi-ed all 32 for the max allowable. This was right before the bubble burst. He ended up losing all 32 properties and declaring bankruptcy, and personally hasn't been the same since.
Debt is a major cause of both foreclosure and divorce, and of course bankruptcy.
As I said before I could not have bought as many properties as fast as I did if it wasn't for debt.
But on the other hand, as I've progressed in real estate investing, most of the purchases are all cash. If you have never done an all cash purchase you will just be amazed at how fast you can settle. We've settled in as little as a few days. How short settlement are, when you don't have 100 documents from the bank to sign. And how much sellers light up when you say that you are buying all cash with no contingencies and will settle fast.
- 13yBrandon TurnerPro MemberInvestor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
I'm a big fan of both Dave Ramsey and Robert Kiyosaki. I'm one of those, like Beth Declercq said "run's my business via RDPD but my personal life following Ramsey's advice" generally. The way I differentiate it is that I fully accept the risks I am taking because all this is - everything - is a game. A gigantic board game with real world pieces. If I play smart, I'll probably win. But I might not. Things happen, fortunes are lost, fortunes are made. It's the game that I'm thrilled with. That said - I don't want to lose the game, which is why I don't do anything even remotely risky in my business.
I know Ramsey says "100% of foreclosures last year were to people with mortgages" (I love that quote) so I'm working to pay my house off. But if, for some crazy reason, rents dropped 50% in my area, and all of a sudden all of my properties cost me more than I could pay, and I lost them all ... I would end up with nothing. And that's exactly what I came into this game with - so what would I have lost? I had years of enjoyment and a career I was absolutely thrilled to wake up in the morning to do (REI.)
If I end up with nothing, that's cool. I can't take it with me anyways, but following Dave Ramsey's advice 100%, I would be working in a group home for $11 an hour, hating every second of that job for 15 more years until I had enough to retire on $50,000 per year.
Sure -it's risk. But so is driving down the freeway, but Ramsey does that.
All that said- Ramsey's making millions right now, and Kiyosaki was sued and his company went Bankrupt. So - maybe Dave is on to something :)
Thoughts?
- 13yBrandon TurnerPro MemberInvestor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
By the way - Michael Manawil - great topic!
And if anyone knows Dave Ramsey or Robert Kiyosaki, I'd love to have the two of them on the BiggerPockets Podcast to debate this. If anyone can make this happen, let's do it.
:)
Originally posted by Brandon Turner:
By the way - Michael Manawil - great topic!And if anyone knows Dave Ramsey or Robert Kiyosaki, I'd love to have the two of them on the BiggerPockets Podcast to debate this. If anyone can make this happen, let's do it.
:)
Thinking big, Brandon!- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
I'm also one of those like Brandon Turner that lives ala dave ramsey and invests ala RDPD that Beth Declercq mentioned.
The way I look at it is this personal consumer debt is worthless it only serves to get stuff that wears out and ends up thrown away. Debt that makes money is different and isn't truly debt it's really leverage being that it is creating a compounding effect on your money.
Now that does not relieve you of the responsibility of using it wisely as we've seen mentioned plenty of people lost in this last cycle because of their over extension on that leverage.
I also don't think you can really compare RDPD and Ramsey, the reason being Ramsey really talks about personal finances and how to become financially free, RDPD really talks about how to build a business system to create a passive income stream for yourself; they're really apples and oranges IMHO.
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes13y
Interesting post because I actually emailed this question to Dave Ramsey the other day. My husband and I read his book, Total Money Makeover, about 4 years ago. At that time we had no credit card debt, no car payments but we had mortgages on 2 rental properties and one mother of mortgage on a principle residence! The RE market was changing and I had already been working 70-hour weeks for years and the prospect of keeping up my income level while sales prices were dropping (i.e. having to do even more transactions) was a horrible feeling. We did the snowball by paying off the lowest mortgage on one of the rentals first (paid it off in 2 years!) and we downsized into a property we could pay cash for. What a relief!!
For me, paying down that mortgage debt, downsizing and saving a big pile of cash made me feel so good and at peace.
We've got some cash and I really want to pay cash but that is very limiting in this market so I have recently decided I will consider the right properties with 25% down and a 15-year-note that still flow a little cash to pay down even earlier.
We have one rental with a little left on it but it's at 2% so I'm not in a hurry to pay it off. And if I look back, we would not have been able to have the properties we currently own if it had not been for mortgages, although I am very happy we own several free and clear (also one owned by my IRA). So, I guess I'm 96% in agreement with Dave Ramsey.
- Bellevue, NE · Member since 2013 · 72 posts · 29 votes13y
This is something that I have wondered about, I read Rich Dad Poor Dad and some of Robert Kiyosaki's other books and even went to a 3 day seminar/sales pitch. I also have read Total Money Make Over by Dave Ramsey and attended Financial Peace University. I haven't started investing yet but thought the best way was to conduct bussiness through an LLC or some other entity. Wouldn't one of these limit or remove personal liability allowing you to practice Dave Ramsey's principles in your personal life and Robert's principles in your business?
- Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes13y
Brandon TurnerI believe the bankruptcy RK had one just one of his subsidiaries and not a personal bankruptcy. I think he still has megamillions.
Been a while but I had to chime in.
Fan of both.
I think you have to look at some of this in context.
RDPD was written before 2008. The philosophy was to leverage to the max and bank on appreciation, maybe even forced appreciation. RE had always increased in value and no one saw any other way for it to go.
I began my investing in 2006. It took months before I landed my first buy. People were buying up investment properties that did not cashflow and made no sense to me. The investors didn't car about cashflow, they wanted to capitalize on the appreciation.
Then 2008 hit and the appreciation stopped, and there never was cashflow. So the "investors" hung on a while and then defaulted.
The survivors bought properties that made sense and cashflowed.
Ramsey hit his stride when 2008 hit because of the foreclosures and bankruptcies. Can't blame him. He was ahead of the tide.
Both have their audience and their philosophies. I think risk is in any decision we make and we each have a different risk/reward tolerance.
Got to do your own DD, and make your grown up choices. To each his own.
Good luck.
- Real Estate Investor · Milford, NE · Member since 2011 · 201 posts · 140 votes13y
Originally posted by Brandon Turner:
I'm a big fan of both Dave Ramsey and Robert Kiyosaki. I'm one of those, like Beth Declercq said "run's my business via RDPD but my personal life following Ramsey's advice" generally. The way I differentiate it is that I fully accept the risks I am taking because all this is - everything - is a game. A gigantic board game with real world pieces. If I play smart, I'll probably win. But I might not. Things happen, fortunes are lost, fortunes are made. It's the game that I'm thrilled with. That said - I don't want to lose the game, which is why I don't do anything even remotely risky in my business.I know Ramsey says "100% of foreclosures last year were to people with mortgages" (I love that quote) so I'm working to pay my house off. But if, for some crazy reason, rents dropped 50% in my area, and all of a sudden all of my properties cost me more than I could pay, and I lost them all ... I would end up with nothing. And that's exactly what I came into this game with - so what would I have lost? I had years of enjoyment and a career I was absolutely thrilled to wake up in the morning to do (REI.)
If I end up with nothing, that's cool. I can't take it with me anyways, but following Dave Ramsey's advice 100%, I would be working in a group home for $11 an hour, hating every second of that job for 15 more years until I had enough to retire on $50,000 per year.
Sure -it's risk. But so is driving down the freeway, but Ramsey does that.
All that said- Ramsey's making millions right now, and Kiyosaki was sued and his company went Bankrupt. So - maybe Dave is on to something :)
Thoughts?
Very well said Brandon......
Sean K
- Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes13y
I am not a Ramsey fan because he filed BK. I am not a Kiyosaki fan because he is a "fake." And yes, I have books by both men and read them. While both men have good ideas, neither one has what I call a BALANCED approach to personal finance.
As others have posted, there is "good debt" and "bad debt." Debt is like FIRE and WATER, it can be beneficial or it can be detrimental, it all depends on how it is used. Even debt on a non- appreciating asset can be good if the terms are right. My last furniture set was zero percent financing for twelve months and I paid it off in eleven months. I just bought a new truck and got 2.79% financing, but I could have paid cash and bought one less house this year, losing 10% to save 2.79%. It's not rocket science. To put it another way, the house I just bought is buying my truck for me.
Leverage, used wisely, raises returns exponentially.
- Homeowner · Anaheim Hills, CA · Member since 2013 · 6 posts · 8 votes13y
I want to thank you all for your participation in this discussion. I hold your opinions high and based on that and several discussions with my wife, we have made the decision to borrow our way into success. I can hear Dave right now, “No! No! No! You said you followed my teachings? You need to go back through the class because you failed. It’s a lifetime membership. Go back!” Yes Patrick G. I too have listened to Dave so much I can answer these questions for him.
After reading RDPD, I realized that both of these Authors are capitalizing on our failures and ambitions. It’s brilliant really. Determine what is completely wrong in America today and fix it. When Dave started it was credit card debt. Invent-plan-to-get-people-out-of-debt. Check. Build on it.
Today, student loans beat credit cards in overall debt. Invent-college-guide. Check. Build on it. (Sorry to bring that up because college debt doesn’t belong in this thread, but I needed to make my point that) Dave is selling to the masses. Robert is selling to the masses. I AM NOT THE MASSES.
Allow me to address individually those who contributed:
Brian Mathews I love how you apply this to your HVAC business. I have always subconsciously done what you said: “I won't take a job I can't buy my way out of in case something goes wrong or the customer turns into a nut job.” A form of self insuring you could say. Thanks!
Derek M. Your comparison is very similar to my findings. It seems as if you must treat this in a linear fashion. Start with Dave to clean up any mess. Educate yourself. Progress to Robert and (many) more Authors. Continue to educate yourself. My next book will be a Frank Gallinelli one.
Bill Gulley I totally appreciate your point of view and I understand that you are unfamiliar with these authors. I can tell you why people don’t read financial textbooks. They don’t fix “MY” problem. It’s funny you should mention finance textbooks because one of Dave’s vertical markets is educating High School students with basic finance principals. Textbooks are dry and to the point. In any financial (or math) class I ever took in school, there was only one thing that determined my success in that class; the teacher. These authors tell “their story” very well. They each capitalized on their own personal history. I actually inherited two finance textbooks that I immediately put up on Amazon for sale. I just might have to take them down and re-familiarize myself with the basics.
Kelly N. Thank you for sharing your story with us, it did help. I aspire to be exactly in your situation in my near future.
Mark Ferguson I agree with you that the vagueness of RDPD left me longing for more info. I can also see that you do have a very aggressive strategy. I look forward to learning more about your successes as this is the first I have heard of that philosophy. Thanks!
Joel Owens I too am a believer in taking informed risks. I also agree that compounding, savings and credit should be better taught in schools (hence Dave's high school curriculum). I had to seek outside education as I was never taught practical finances in school. We live below our means, but that doesn't mean we don't enjoy ourselves. For those who fear loss and avoid the unpredictable, the FDIC insures your deposits. My emergency fund is making me nothing! It's insurance. I could never put my emergency fund it anything that wasn't 100% secure. My life insurance costs me money (different topic); my car insurance costs me money; therefore my emergency fund costs me money. I shall take calculated risks on with my new RE aspirations. Thanks!
ANISH TOLIA Thank you for that perspective. I am starting to better understand the concept of borrowing for appreciating assets. I too would not play craps, but I do play the stock market via mutual funds. I’ll start another thread on that topic as I made 13% on some of my mutual funds this last year. With experience, I am sure to be able see risk differently.
David Krulac I really like your method. I do think that it will also bring me great success. Borrow just enough for no debt investing then go from there. You are very correct when you say, “Hey debt is debt, you owe it and somebody wants it repaid, does it really matter if it’s an individual or an institution?” Thank you.
Chris McNeal I currently work a 9-10 hour day. I totally get your point. Leverage will allow me to go above and beyond my capacity. The funniest thing I ever heard when I used your same can’t-pay-for-car-repairs scenario: “…and the best thing about my new BMW M5 lease, I don’t have to pay for repairs for four years, and by then, I probably will have a new car already.” That just makes me cringe.
Thanks George Paiva. Borrowing wisely looks like where I am going.
Tamara R. Your timing was really good. I hope I am not behind the curve as I can already see the markets hardening in our area. That will not deter me though, I’ll just have to work a little harder for it.
Annette Hibbler I was given RDPD when I was 21 (and the book was current). It sat on my shelf for 12 years before I picked it up. I was also taught compound interest and Roth IRAs then too, but did I do anything with that knowledge? Nope. It took me a long time to figure out what I thought was right, wasn’t. But, I am better because of it. I look forward to using debt wisely.
@Patrick G. My wife and I are both nerds and free spirits at the same time. We both pick and choose our battles. As I mentioned before, our only debt is our home and I will never go into “consumer” debt. We are both conservative, and will remain that way. Starting small in Orange County, CA means $200,000. I just saw an 883 sq ft, 2BR 1BA condo on Redfin for that price just down the street from us. I am interested to see what they actually get, but even if they get 75% of asking, that’s still $150,000. I have no intentions to landlord a place over 10+ miles away from me. My parents do that and I see their pain. I will have to borrow to succeed. I hope you enjoy RDPD. I found many parts of the book humorous and captivating.
Kyle J. Thanks for mentioning “could easily make my mortgage payments if something were to happen”. That is one of my fears, not being able to make the mortgage, in terms of vacancy or inhabitability. I’ll have to calculate out a good 3-6 month reserve as a part of my risk strategy. I would hate to lose a property due to lack of income.
Charles Morgan Thanks for that perspective. It is interesting to see your use of debt. I could see your method taking longer, but when it’s all said and done, you have an income property that you wouldn’t have if you didn’t keep the debt originally.
Beth Declercq Cheers to starting so early! Referencing Dave’s teaching of Ben and Arthur, two people investing at 12%: Ben invested $2,000 a year between age 19 and 26 and Arthur invested $2,000 a year at age 27 to 65. When they both went to pull out their money at 65 years old, Arthur was still behind Ben $700,000. All that to say, “I wish I knew at 19 about compound interest what I know now.” I do appreciate your comment: “whatever category you decide to be in, surround yourself with people who line up with your thoughts and stay true to what your comfort level is.” I take that to heart and will live that way. Thank you.
Mike H. Thank you for your math. I am a numbers guys and I totally understand what you are saying. Why pay off my sub-4% loan when I can use that money to make much more? Until recently, that wasn’t really my mindset. Your graphical explanation really helped. Unfortunately, I need to work with prices double those you are working with.
Sean Kremer Thanks for your post. I soon hope to have enough passive income to enjoy my baby daughter at the pool during the work week. Smart use of debt. Got it.
John Thedford Great quote: “I am not fond of debt, but it helps to make my goals a reality.” With your permission, I’d like to use that again. Thanks!
Brandon Turner Thanks for posting on my thread. I hope to provide more stimulating topics. I tell my wife all the time that this is all a game. It really is how you draw the cards and roll the dice. Sometimes I land on "chance" but I rather skip my turn if I can predict the future. I am excited to play the REI game now. I don't know either of them, but I did have an opportunity to stop by Dave's office in Brentwood, TN earlier this year. He wasn't there but I was taken on a "back stage" tour of his office. I was truly honored. While there I saw a picture of Dave, Robert and Kim and I asked if I can take a photo. I got permission. Even polar opposites can smile for a photo.
Matt Devincenzo I can see what you are saying. I am really asking about borrowing money and I am incorrectly comparing the two. RDPD does go into much more than Dave’s teachings. As I mentioned before, I have learned that it is linear, Dave before Robert. Thanks!
Shari Posey Did Dave answer? I have an idea of what it would be. I too would probably be 90% Dave when it comes to his teachings.
Greg B. Thanks for chiming in. When reading RDPD, I actually stopped to check a couple of times when the book was actually written. I realized that I had to apply what he was saying a bit differently to today’s market. I am looking forward to making grown up choices.
Mike M Thanks for your post. I am starting to see more from your perspective. I agree completely that neither one of them is balanced. I really appreciate the statement, “the house I just bought is buying my truck for me.” It is my goal in life to have my properties buy everything for me.
Thank you all again for helping my decision making and my education. I hope that in the future, I will be able to share my experiences and help others on BP. Happy Memorial Day!
- 13yBrandon TurnerPro MemberInvestor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
Awesome Michael Manawil! Great photo also. I think we totally should get those two guys to debate on the Podcast. It's my new goal. :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Actually, the texts can solve problems and prevent people from getting into them. I do agree the teacher can make a difference, but now anyone can read a text, get on this site and it can be addressed, I taught finance and other business subjects.
Reading comic books with an agenda doesn't make one think, I suppose many today don't want to have to think, they just want an answer, those types can read all the comics ever printed and they will never be able to fly, the real world requires you to adapt concepts to situations.
I'd say that there are reasons to leverage your personal life and any business environment, the trick is having a good foundation to build on and apply those functions or aspects which are appropriate, keeping with some simple rules and common sence.
It's a problem when someone has the goal ofjust selling ideas, or systems, approaches or whatever and claims there way is the cure all, life isn't like that, but then solving problems is not thier real goal, selling books are. :)
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes13y
Michael Manawil. You are welcome. Use it anytime. This thread has been quite interesting to see the different responses. BP presents a never ending school of thought!
Ramsey has some great advice, but his advice is also hurting his followers.
For example one of my good friends not buying his first home 2 years ago (everyone knows what the market was doing 2 years ago). He could have got FHA financing.. 3.5% down.. under 4% rate on a 30 year note and sold today.. and made $20k+ without throwing away rent.
Instead he is putting all his money into savings, losing money every month due to inflation by not leveraging the banks $$$.
I don't agree with Dave at all on paying cash for properties. Doesn't make sense for ROI. You actually get a negative ROI if you pay cash and rehab, etc.
Michael Manawil
I'm a bit late to the thread, but I can share how my thinking has evolved on the subject. When my wife and I were starting out, we had a fair bit of debt. A loan I'd used to consolidate the debt piled up in my former marriage, and a car loan. We'd just had a kid, and desperately needed more space than the 525 sq ft apartment we lived in. We bought a modest house, so there was the mortgage on that too.
We were ok, coming out in the black each month, but not by much. We saw that our debt was the biggest thing standing between us and having more financial freedom. Meanwhile, I was doing well at my job, and my income was starting to go up. So we annihilated all the debt. First the previous marriage loan, then the car, both of which we were paying about 10% on.
Then our second car was falling apart and we needed a new one. Because I drive 250 miles per week to work and back, it made the most sense to us to buy something new. Since we'd paid off everything but the house, and it had taken a lot of work, we were determined not to add new debt. So we knuckled down and saved up enough money to buy a car without borrowing.
Then a dilemna presented itself. While we'd been doing all this paying off, our credit scores had improved, and we were offered 0% financing on the car. Even though we didn't like the idea of more debt, we couldn't see spending all that money if it didn't save us anything.
Our compromise was to take the financing on the car and put the money on our house instead. That way our overall debt didn't increase, and we were saving the 6.5% (actually 7% including MIP) interest on the mortgage. We found an online mortgage calculator that allowed you to calculate the effect of extra lump sum payments. We were stoked to see that putting the car money on the house had knocked over 8 years off our mortgage! We saw that with another push, we could get it to where our mortgage and paying for our eldest son's college would no longer overlap. So we started making extra payments every month, got addicted to the progress we were making, and wound up paying the whole darned thing off. I must admit it was a great feeling knowing that we owed absolutely nothing.
So those were the lots of debt and no debt at all phases of our lives. Then I got interested in investing in real estate, and started trying to figure out how the whole thing worked from the numbers perspective. Of course my first plan had everything being bought with cash, because that was the thinking I was used to from our personal lives. Needless to say, the results from my first attempt at a 10 year projection were pretty underwhelming, and I started to see the value of using leverage in a careful manner.
These days I see the whole thing from a bit more of a mathematical perspective. If I can earn more by hanging on to the cash than the interest on the debt, then I'll consider it. If the debt costs more than I can easily earn with the money I keep, then it's bad debt, and not to be touched with a ten foot pole.
Then there's the risk side of it all. If I'm paying 9% interest on something, but only earning a 10% return, then the way I see that is that I will *definately* be paying the 9%, but *might* make the 10% because that hasn't come to be yet. So the difference has to be larger to account for the uncertainty.
Still on the subject of risk, a financial cushion is really important so that you can still keep afloat in the event that things don't go well with the investments that you've incurred the debt on. Either you've got to earn a good amount more than your monthly commitments, or have a sizable stash, or both. To me, having been conservative with our personal finances and having paid off all that debt buys us the cushion we need to be a bit more aggressive with using debt to invest.
-HarryTwo things I wanted to add though.
1) Someone commented about one of the investors that mortgaged everything to the hilt and then lost it all. Well, did they lost their portfolio because they had mortgages or did they lose them because their mortgages were so overinflated that they had no cash flow?I would bet the ladder. The fact is that if you're getting properties at 70% LTV and are taking out mortgages for homes in the typical rental range (50 to 90k loans), you're likely making 300 to 500 a month before repairs/vacancies. That also means you're not likely to go under with those kinds of profits coming in.
2) A comment was attributed to Dave Ramsey that foreclosures are only happening to people who have mortgages. Thats the logic he's using to convince people to pay off their 4% mortgages? How can anybody buy into something that ridiculous?
Thats exactly like saying that only people in business can go out of business. So does that mean you should never start any business? Tell that to Bill Gate or Mark Zuckerberg.
Thats like saying that "only those people who have a job can get laid off". Come on. One thing I don't have is tolerance for nonsense and to say something like that as an argument to pay off your home is just plain stupidity.
You want to talk about risk? How about the risk of someone that would have 400k in cash and then followed Mr. Ramsey's advice and paid off his home entirely. And then that home is now worth 200k today?
And what if they lose their job and had no significant safety net left? How much do you think taxes are on a 400k house? Here in Illinois it would be around 1k a month.
What kind of return did that 400k get you on a 200k house? Talk about gambling. Whats your real risk if you lose your house? You can always rent. You can always buy another house in 5 to 7 years. You can never get that money back.
So while I understand the whole thing about people with a very low tolerance for risk. But if people on here would actually follow that advice (i.e. pay off your own mortgage before investing), I would be 90% of the millionaires on here would never have become millionaires.
3) One other thing. I also saw a comment on here about being incredibly risk averse but then the investor mentioned they would only invest with a 15 yr note. Why? To me, thats where the biggest risk in real estate comes from. People who don't try to maximize their cash flow.
What are you going to do should a rainy day come and you need that extra cash? You can't tell the bank you want to pay them less. Why not get the 30 yr mortgage and then make additional principal payments to pay it off in 15? The advantage is if you really need the cash, you can make less in your payments if you want to and have it.
I still say the biggest risk factor in a loan has nothing to do with LTV and has everything to do with cash flow. The more a house cash flows, the less likely it is to go back to the bank.
Can I come up with any numbers to prove that? Of course not. But just from a common sense stand point, if I was hurting for money and had two homes and one had cash flow of 500 a month with 20k in equity and the other cash flowed at 100 a month with 30k in equity, I'm keeping the 1st home without a doubt.
- Abingdon, MD · Member since 2013 · 193 posts · 60 votes13y
Michael Manawil, I'm sure you will be fine! We all have to make our own personal finance decisions. As DR says 90% of personal finance is "personal". (or something like that) The most important thing is that you and your wife agree on what to do.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Michael Manawil
Debt or no debt?
I not sure that there is ONE answer. And I never bought the good debt/bad debt argument. What is the difference if you have:
a. a house with no debt and a car payment of $599 a month or
b. a house with a $599 payment and a car with no payment?
There is no difference! Debt is debt. When you write the check every month, your check book doesn't know whether its paying good debt or bad debt, just that your account balance is reduced by $599.
And one size/solution to the debt/no debt debate does not fit all people at all times.
I think that it is admirable to have your personal residence debt free. I've had that feeling though only seemingly momentarily. I've financed my first home, my last home and all the homes in between multiple times; refinancing for lower interest rates and cash out. Always using the cash out for other real estate investments. Except once when I used a second mortgage to buy a brand new red Corvette. I ended up selling the red Corvette and bought 10 properties with the proceeds, but that's another long story.
When first starting out in buying real estate investments, many would be investors have little to no cash. Believe me I know. If your goal is to own one or two properties then following the little to no debt path could work. But if your goal is to buy more then debt is a necessary evil to accompany that goal. The first 5 properties that I bought were all essential 100% financed. I did not have the option of waiting until I had the cash, if I wanted to buy that many properties that fast. If your goal is a slower timetable, then that might work for you.
But as you advance in your real estate investment career, presumably you are successful and have a less reliance of financing.
hopefully you reach the point where everything is self financed, 0% financed.In the mean time, I still say borrow as much as you can for as long as you can (with caveats), and that today's historic interest rates won't last forever, so take advantage of them while you can, they won't last.
Millions of dollars of debt can be a burden, ask me how I know that one. But I decided that I was going to go on a debt reduction diet. I sold some properties and used the proceeds to pay off other mortgages on properties that I kept. What's better 50 properties with mortgages or 25 properties with no mortgages? For sleeping at night the latter is better.
I came across Dave Ramsey's TMMO back in 2006 and it changed my life. My wife and I paid off $27K in about seven months. By the time she gave birth to our first child 9 months later, we had saved an additional $15K and she was able to stay home with our daughter. Now, 7 years later, she still stays home with our two kids. We were able to do that because we followed Dave's advice, although not to the letter. We simply needed to learn how to be financially disciplined. We still use debt, but sparingly. If we want something that we can't afford to pay cash for then we find the best deal, finance at the lowest rate, and pay it off as fast as possible. We never finance more than one big ticket item at a time.
Now, I am completely comfortable with the concept of using other people's money to build wealth because I know that I am responsible enough to manage it properly. If I had to save my own money before getting into real estate then it would take far longer to do it and the returns that I would lose in the years that it would take to get to a point that I could afford it would be huge. Even worse, I may lose interest in real estate during that time. Good luck with your decision.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Just four simple rules to use debt. 1. Be able to pay as agreed without any significant sacrifice. 2. Be able to payoff the debt if needed. 3. Never use long term debt for short term needs, especially for depreciating assets. 4. Never use short term debt for long term needs unless you can meet the first two rules. :)
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes13y
Michael Manawil, I do have a very aggressive strategy. With the returns rental properties produce I am trying to buy as many as possible. My goal is to buy 100 in the next ten years. I have a ton of articles and details on my goals and properties on my blog.
David Krulac, I completely agree with you. Debt is debt. I use it to buy more houses whether is on a car or house.
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