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
- Real Estate Agent · Hackettstown, NJ · Member since 2011 · 206 posts · 62 votes13y
Bill Gulley
You might get what you wished for! LOL
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Where did I put my Sub-2 Contract offers......? Someone hand me a pen! Gotta call the bank, later! :)
Sorry for being so late to the party ;) my own two cents have always been to avoid debt at all costs - works for me.
And don't listen to the "buy now or lose!" advocates, either - there are good deals to be had anywhere in the world (as well as attractive cash buys).
I've repeatedly written and will do so again - buy what you can afford, when you can afford it (as to the where - the world's your oyster, again).
Best of luck!
- New York City, NY · Member since 2012 · 60 posts · 14 votes13y
I must appreciate everyone here for expressing their thoughts on this, what i picked from this is to differentiate between good debt and bad debt.With bottom line being, using loan to generate more income and not for consumption.That comes out clearly in Robert Kiyosaki's books as well.He is against bad debts too.
Both Kiyosaki and Dave stand for the same principals, maybe they say it differently but it all means the same thing. - Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes13y
I kind of think of it this way.
Ramsey is probably the best way to go for most people.
Kiyosaki is the best if you don't want to be like most people.If you live your life debt free (Or really close to it) you are doing better than probably like 80-90% of people in this country.
That being said it is not easy save your way to prosperity and buy a lot of great high yield investments with cash. You can be highly disciplined and get some good investments and be able to live pretty good, but it will be a long road to get there.
I recently started listening to Ramsey's podcasts. He's an interesting guy for sure , and he does give excellent advice. I also find him pretty funny.
From what i've heard when he was younger he build a large real estate portfolio , but overleveraged and lost all of it or most of it.
I think his advice is sold for most people .
I think paying all cash sounds nice in theory, but in reality even people that are already wealthy borrow money.
With all the people that have bad consumer debt out there I can see how the term debt could be viewed negatively.
It's similar to the way real estate investors were viewed mostly negatively when the housing market crashed. It was the "real estate speculators that brought the market down"..which wasn't really true.
It's funny that now real estate investing is portrayed as the 'smart' thing to do these days.
Isn't it funny that no mainstream media was talking about real estate being a great buy in 2009,2010,2011..the best years to buy? They were just throwing about stories about poor homeowners losing their homes . Now that prices are way off the lows they are telling the masses to invest.
This is why it's so important to read between the lines, and to get info from places like biggerpockets.
To make money you can't follow what everyone else is doing. It's best to follow the people that are making money.
People that make money by and large borrow money (or use other people's money) .
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Joseph M
1. I've been buying every year since long before and including 2008, 2009, 2010, 2011, 2012.
2. I do know many people in the business that do buy with no financing. Besides mortgage and tax foreclosures which require day sometimes immediately, many seasoned investors buy with cash, short settlements and few if any contingencies. It a way of doing business for them. At one foreclosure sale a bidder was blowing everybody away with his high bidding, he spent around $2M, and payment in full had to be within 15 minutes after the sale. Shortly after that he did a subdivision deal where he swooped in and paid $3.7M in cash for the whole subdivision, getting it for less than other financed bidders. Its just the way he does business. Hang around the foreclsoure sales, the public auctions and the subdivision deals, you will be amazed how much gets taken down all cash.
David Krulac Good points regarding cash buyers. I have no doubt that people are buying with cash mostly to get the best deals. Some areas have very high percentages of cash buyers.
But ..How many of these buyers are looking to buy and hold the properties long term? Also if they are actually holding paid off rentals how many are doing that because it's their actual preference or because they can't get financing (bad credit,etc)?
How many are leveraging by refinancing soon after the purchase?
I just don't see buying buy and hold rentals all cash as the best strategy..especially if one is younger. I could see it making more sense one one is older or retired and beyond working age. All the tenants could move out at once or something and you'd have that mortgage to pay ,etc...but if you've been doing it the right way for decades there should be funds to cover that type of situation.
- Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes13y
David Krulac I would guess that guy making all those HUGE cash purchases was using OPM to as least some extent. You can't use a bank for that kind of stuff but you can have a "fund" or for the numerous small purchases use individual funds on each place.
If it was all his cash I have a very hard time believing he aquired almost $6M cash just by saving money from his job and buying his investments with what was left over. - Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes13y
I have thought about the posts in this thread and here is my take on financing vs cash. When I bought my first house it was a trailer house. I actually got it for money I was owed from someone. It was a fairly good deal because my income had dropped a lot and I was going to college. No financing. I borrowed to buy the land and trailer I bought next, when I moved to a town with a university to further my education. I financed the land at 10% and the trailer at 18%. I would have had to rent if I had not financed. Times were very tight but we managed to make the payments. When I graduated from college I was making less than before college because the economy had died. Houses were cheap but I was broke. I again bought, but this time a house, and rented my old trailer for just enough to cover its payments.(I was a horrible absentee landlord and the place got trashed) When I finally sold the trailer and land I paid off my house, instead of buying a rental. Paying off debt was my main priority, because there was a real danger of even a small setback causing me to be unable to make my monthly payments. Borrowing to buy real estate investment property would have been the wrong thing to do during that time. I was too inexperienced, too poor, and lacked a plan. Eventually I learned what house prices were and a realtor and I both saw a house for sale very cheap and together we were able to buy and fiance it, where neither of us could do it seperately. My personal income finally began growing and between the two of us we eventually accumulated a dozen properties over the next 20 years, and every one had to be financed. I like having all my debts paid, and I loved Dave Ramseys approach because it had ideas that made sense, but I would have only been able to buy 2 or 3 houses if I didnt borrow. Risk in investing IS like risk in driving a car, it is allways there, but if you don't drive you won't get anywhere. You have to learn how to drive safely, you have to have a safe car, you don't begin driving on the interstate at 85mph in rush hour traffic your first week or you will wreck. You learn to drive safely with a mentor. you will eventually have a wreck, but if you wear your seatbelt, buy a car with airbags, and were driving safely enough to avoid serious injury you survive it and learn more. I know some folks who never learned to drive and their life is very limited because of it. You cannot promise them they would never wreck, but without some risk they lose some of the quality of life we enjoy. Teen drivers think they know everything about driving, so mentors have to temper their enthusiasm to safe levels, if they do not develope dicipline they will crash, but hopefully live to learn. Not all do and sometimes its not their fault when the wreck happens. Unless you were given great wealth, it takes some debt to truly go anywhere in real estate investing. Be smart, study the market, analyse cash flow, buy below market, have a cash reserve, buy insurance, be frugal with your fiances, and have a mentor with experience. Drive at the level you feel safe at. There is allways risk but overcome as much as you can. Use dicipline and keep focused to get to your goal.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Joseph M
"I just don't see buying buy and hold rentals all cash as the best strategy..especially if one is younger. I could see it making more sense one one is older or retired and beyond working age. All the tenants could move out at once or something and you'd have that mortgage to pay ,etc...but if you've been doing it the right way for decades there should be funds to cover that type of situation."
I do agree and earlier in this thread, I did say that the first 5 properties that I bought were all essentially 100% financed. When starting out unless you were born with a silver spoon, which I was not, then borrowing/financing is pretty much the only way to go. I could not have bought 5 properties using the saving method either as I was not making much money. When I bought my first house I was making $8,000 a year, not much room for saving anything there. Buying real estate became my savings plan and even after buying 5 properties, i still was not saving money in the bank. I was spending the money on improving properties, down payments and
closing costs.After becoming more established, it does become much easier to avoid banks. Since 2007, I've bought over 100 properties and only mortgaged 1. And that one property I didn't need to mortgage, could have easily paid cash but the financing looked good to me, non-owner occupied 90% LTV, fixed 4.5% for 30 years.
Dave Ramsay says don't borrow at all... I disagree with that, as obviously I've borrowed millions, never defaulted, still here and still investing.
Robert Kiyosaki says your home is not an investment and you should never borrow against your home... I disagree with that, I've borrowed, refinanced, second mortgaged, HELOCed, etc many times, every time but once taking the proceeds to either buy another property, rehab a property, or pay closing costs. The one exception being a brand new Red Corvette.
Then there is the good debt and bad debt argument.... I disagree with that also. Debt is debt. If you have a free and clear house worth $60,000 AND a Red Corvette with a $60,000 loan; it it any different than a $60,000 house with a $60,000 mortgage AND a free and clear brand new Red Corvette? Obviously there is NO difference in the amount owed.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Joseph M
Buy & Hold all cash...
I agree that is not possible for many people, especially when starting out.
But lets say that your plan is that you want to accumulate a bunch of buy and hold rentals. How many is up to your individual goals and plans. The end game for many buy and hold investors is to get to the point where those investments are free and clear and are throwing off tons of cash. For most B&H investors mortgages are the biggest expense. Eliminate those mortgages, and cash flow multiplies.
So IF free and clear B&H are your goal, ONE way of achieving that sooner is to sell half the inventory and pay off the other half with the proceeds and end up with half the rental but much more cash flow, maybe at retirement or sooner.
And if free and clear rentals is the goal, and you've accumulated proceeds from being in real estate, why not just buy the properties with no mortgages to begin with?
And buying with out mortgages:
1. Makes the settlements much quicker and not so many papers to sign.
2. Saves all the bank fees or bank required fees, save thousands per transaction
3. Allows you to move quickly, buying and settling deals fast, days instead of months.
4. Often times you can get better deals with all cash offers.
5. Don't have to deal with escrows for taxes and insurance.
6. Makes sure that taxes are paid in the discount period.
7. Saves recording fees for mortgages and Satisfaction pieces
8. Reduces your chances of foreclosure. (DR says the major cause of foreclosure is mortgages.)
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Shaun Reilly
The $6m guy does not have a job, he owns a very profitable business and he self finances, at least the purchases I've seen.
Even the small investors at foreclosure sales are most often doing it with their own funds. There is a professional foreclosure company, that i know who does have a multi-million line of credit that provides their funding.
Overall in the United States about one third of real estate is un-encumbered by mortgages. And there is about another third that have smaller mortgages on their property of less than 50% LTV; sometimes as small as 10% LTV.
With bond and CD rates so low there are a lot of people sitting on cash that are looking for places to put that cash. Some are paying off mortgages. One investor I know is paying off 8% interest mortgages with money he's withdrawing from his own bank account because of the low returns.
Another investor just bought a bank, not the business, but the land and building of one of their branches. He's getting around 4% cap. Better than CDs and relatively safe.
And of course those hedge funds are paying cash also. There is a big cash business out there.
- Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes13y
David Krulac I agree with most of what you are saying. I also am aware of the large percentage of unencumbered or low LTV mortgaged properties.
One reason why the medias portrayal the last few years of "Everyone" being underwater was ridiculous.I think that the general plan you talked about where you levered the heck out of your early holdings but eventually went towards reducing debt is a fabulous plan that will reduce a lot of risk and drastically increase cash flow over time.
Really I think that the only thing we really are disagreeing about is that I think that the OPs original question was a black and white should you be willing to use debt or NEVER use it.
You clearly aren't a lever forever type but you were also willing to use debt to build your portfolio to the point where you had the income to try to erase that debt. - Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes13y
Originally posted by Michael Manawil:
I am a big Dave Ramsey fan, and I have been for years. I am debt free, except for my house and intent to stay that way. Well, at least I intended to stay that way. I recently read Rich Dad, Poor Dad. Robert Kiyosaki's philosophy is completely opposite of Mr. Ramsey's. His intent is to use OPM (other people's money) for real estate investing.I'm willing to bet that all of Kiyosaki's debt is held by corporations and that he personally is debt free. Can't confirm that but I suspect it.
Absurd to even consider buying long term real estate without debt. I'm honestly baffled why there is even a debate about this.
Better to pay cash or draw against a pre-arranged line of credit for short term deals, rehabs, and flips that require speed.
I browsed through this thread and didn't really see any mention of what income tax does to your income on long term holdings that are debt free.
On stable, boring single family residential, 60-70% medium to long term debt is definitely in order. It will safely increase your cash flow from 7% to 9% and your appreciation from 2.5% to 8%, and reduce your ordinary income tax bill from roughly 15% to 0% over the first five years or so. Medium to long means > 10 year money.
- Real Estate Agent · Cedar Falls, IA · Member since 2009 · 38 posts · 17 votes12y
I live Ramsey for my personal life and all Kiyosaki when it comes to my real estate. what you need to remember is to have a good amount of reserves set up. I like to have a year to two years worth of expenses set aside in savings. then you have enough money to handle a lot of things that will come your way. I even hold some of that money in Gold and Silver because i enjoy those markets. my wife and I still live in a payed off mobile home while we buy and fix houses. I get a lot of crap for that but its also why I can buy 12 units in three years with almost 30% equity. PS Im only 30.
Michael, we are in a similar situation to you. We bought our investment condo 12 years ago and had to pay $200/month over and above the rental income to meet all expenses. Finally, rents increased to where we have positive cash flow, and we also paid the loan off. Now we're at a 10% cap rate and are looking for another property. Understanding debt is a great skill. With interest rates so low right now, i'd say that most debt is good debt. We're struggling to choose between a 3.75% fixed for 15 or a 4.125% 30 due in 15, which is the classic cash flow vs. equity choice. In the SoCal area, a large down payment would seem to be the only way to obtain good cash flow, which is contrary to many strategies. Much depends on your timeframe; I have good income from my day job, so can choose to lose something now and end up better later on.
Good investing,
Bruce
- Rental Property Investor · Annapolis, MD · Member since 2014 · 214 posts · 140 votes12y
Michael,
I say, do the best of both worlds! For your personal finances pay everything in cash and be depth free (other than the mortgage).I wish I did this part sooner :)
And for investment property you could do like I sort of did:
I purchased most of the investment properties 10-15% below retail with no money down rent it out (made a little cash flow from day one). On a couple of hosues I purchased the Refrigerator from the first month's rent. Than years later built up reserve and aggressively tackled paying down dept.
Warning: comment sense must be applied on high leveraged purchases at this stage to make sure you are not taking over someone's differed maintenance issue. Like you need a new roof in 6 month!!
On the long run you will be all right and in the mean time you can get started on investing with little or no resources.
- Fix & Flip, Wholetailing, · West Columbia, SC · Member since 2013 · 215 posts · 60 votes12y
Nice thread here that really caught my attention. I enjoy listening to Dave and have read a few RK books as well. I have thought the same thing many times Michael. Good take and observations from @Mark Ferguson @Joel Owens @Bill Gulley and several others.
Also Dave's book Entreleadership is a favorite of mine, I also really enjoy the podcast.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @Account Closed:
I am a big Dave Ramsey fan, and I have been for years. I am debt free, except for my house and intent to stay that way. Well, at least I intended to stay that way. I recently read Rich Dad, Poor Dad. Robert Kiyosaki's philosophy is completely opposite of Mr. Ramsey's. His intent is to use OPM (other people's money) for real estate investing.
While listening to the BP podcasts, everyone mentions Rich Dad, Poor Dad as a book to get ideas from. (They even make fun of it.) I got the ideas, now here is my dilemma. If I want to get started with my first buy-and-hold strategy this year, I have to borrow money. If I am completely true to Dave Ramsey's Philosophy, it will take me at least six years to cash-flow a rental (based on my current budget, and a loose prediction of the future condo/TH prices in my area).
Though I understand the risks of borrowing, I am too naive to know the rewards.
I would love to hear how people started with their first home, and if borrowing is the better way to go.
Thanks for reading. -Michael
HI Michael,
I think the audience and positioning of the two authors is different, Kiyosaki discusses debt from a position of knowledge and whats possible if you know how to utilize debt correctly. If you know what you're doing and you buy right on the way into a deal, debt can make you better off. While Ramsey is like advice for the masses since they won't have the knowledge to utilize debt correctly. This advice will work for most people since the average American is in up to their neck in credit card debt. This is the debt that Kiyosaki considers "liabilities," not "assets," since the item or property might be asset under different circumstances but when the cash is flowing out of your pocket it is a "liability."
Ramsey's position is that you should live debt free which may be true for most people to get out from under the burden of debt because they use debt to consume not produce. I've glanced at his show before on TV and the average audience needs advice that caters to their scenario not the inspiring talk that Kiyosaki is positioning in his material.
If you understand the terms under which you are agreeing to borrow at and the potential upside in the best and worst case scenarios and you can borrow at a cost that is way below your potential income or equity growth potential then you have positive leverage or what some would deem a "good deal." The problem lies in obtaining the financial IQ to do all this due diligence to know you have a good deal or not.
Kiyosaki stresses financial IQ and his message is to inspire you to obtain that knowledge so that you are well equipped to use debt and invest in a meaningful way. He doesn't give you much actual advice, mostly just motivation however a lot of his ideas have a lot of depth and he does a good job at inspiring you to learn further.
The David is very far to the right. The folk who are over leveraged and on the extreme end of he risk curve are far to the left.
If you are buying well, and the property conforms to the 50% rule, there's room for a loan. Maybe 80% LTV, maybe just 50%. If I have $2000 in rents and $1000 after expenses, I should be comfortable paying $500/mo on a mortgage, and still have $500/mo as a return on my downpayment. This should take all expenses as well as vacancies into account. Someone looking to use rentals to invest for retirement is going to be far better off with 5 properties all 80% mortgaged than with one fully paid off.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes12y
I'm not "very far to the right."
What I said was that having 10 properties free and clear is probably better than having 20 properties mortgaged to the hilt. Ask me how I know this.
- Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes12yI think it's human nature to want to veer away from Dave Ranseys plan because it requires sacrifice and is hard. I mean, if you actually have to save up for something to eliminate risk, it's hard because most of us are impatient an want it now. So that is why most people would rather go with Kryisoki's methods.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes12y
Because I've owned more than 20 properties with heavy millions of debt and big monthly payments.
When I started I needed debt, first 11 bought were essentially 100% debt. I started with nothing and if not for debt, I could not have started.
But once established, you can make more bottom line with free and clear rentals and not paying for all the debt.
Debt was my biggest expense every month.
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