Ramsey Fan and Credit Cards

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Ramsey Fan and Credit Cards

Chris Virgilio
Real Estate Investor · Greensboro, NC · Member since 2015 · 12 posts · 3 votes
Hello everyone, My wife and I are looks to get in to real estate investment within the next year or so. To date we have been Dave Ramsey fans and are totally debt free as of about two weeks ago. Yay! Now we are saving up an emergency fund and should have that finished up by the summer. As I've been learning and researching, reading the forums, attending BP webinars, listening to the podcast, etc, I get the overwhelming impression that investing with an all cash strategy isn't popular, and I have seen the math worked out in several threads. I understand the logic. We are aware of the popularity of leverage in investment, and are trying to decide if we will be able to come to grips with it enough to allow our potential business to utilize it. It's a scary thought for us right now as we are just freshly debt free. As a result, we currently have zero credit cards. My biggest question is this: should we consider getting a credit card in order to keep our existing credit (which is actually quite good) growing in hopes that it will help us find decent loans in the future, or is it something that isn't necessary? I want to get the communities thoughts before pulling the trigger on another debt product. Please be thoughtful in helping us make this decision, as it's not an easy one for us. The reluctance is indescribable.
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Charlie Fitzgerald
Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
10y

Call Dave and ask him...you already know the answer. :) I think if you want to be an investor AND follow Dave's advice, it will be ve4ry difficult to do. I am a big fan of Dave's teachings and have facilitated many of his Financial Peace University events. At the same time, Dave has an extraordinary benefit that the vast majority of his followers do not have,,,he has the income stream from his products to invest. I think one could still be a debt free investor, if you are willing to start with the very small cash deals you can afford to take down with cash, by saving up the cash needed and doing it. I also think that a group of similar thinking people could form a JV group and pool resources and do the same thing...again using all cash from the parties. Lastly, I think that some of Dave's followers will find themselves too drawn to the potential profits that investing in real estate can bring and they will succumb to the lure of financing of some type to get into the REI world.

So, you need to decide what is important for you and your family and how badly do you want to do what you need to do to reach goals that you set and what are you willing to risk to do it.  Somewhere in there lies your answer...Dave's would be DO NOT BORROW MONEY!  You did not work so hard to get debt free...to go back into debt.

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  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Chris Virgilio:

    @Cal C., I'm not sure if that is an argument for or against using leverage to fund REIs?

     Let me put it another way.  

    If you find a property you really like would you be more apt to buy it if you could only finance 10% of it or 90% of it.   Does it look great when you have 10/20% of your money in the project, but not so great when you have 100% of your money into it?  

    My point is using opm allows you to go for riskier investments after all it is not your money your losing its other people's money.   

    I believe in using debt to buy real estate, but it comes with inherent risk already and people's natural propensity to spend more or more spend more easily when they are spending something other than the money they earned through blood sweat toil and tears only increases that risk.  

    I think the question investor's need to ask themselves when buying a property is- Would I still buy it if I had to use my own cash for it?  

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  • Marcus Johnson
    Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
    10y
    J Beard Case2 works great if everything goes perfect and no large expenses like a roof or a renovation takes out your NOI. More rentals=more probable expenses, less rentals =less expenses on average. Oh and the probability of more vacancies.
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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Marcus Johnson:

    J Beard
    Case2 works great if everything goes perfect and no large expenses like a roof or a renovation takes out your NOI. More rentals=more probable expenses, less rentals =less expenses on average. Oh and the probability of more vacancies.

     well said :)  Many here at BP seem to be focused on building portfolios as if the number of properties is an extra measure of success; but case2 is how it can be done.  

    BTW: the NOI almost always gets an impact of you take some action :grin:

    Personally, I'm into MFUs directly for the reasons you list; less to maintain and less impact of vacancies.   I'm measuring my success by the cashflow  and c/c returns.

    1Reply
  • Chris Virgilio
    OP
    Real Estate Investor · Greensboro, NC · Member since 2015 · 12 posts · 3 votes
    10y

    @Cal C. I'm still confused. Are you advocating investing only 10-20% down payments because it lets you get in to riskier properties? I'm sort of assuming that your implication is that higher risk leads to higher reward, but intentionally leveraging one's self simply because I can get riskier properties that I wouldn't otherwise dream of owning sounds incredibly counterintuitive. I think my hangup on that line of thinking is that I thought we were trying to mitigate risks.  Obviously debt=risk, but add on top of that a property that isn't fit to buy cash, that seems like more risk then is necessary for a beginner. But maybe I'm naively missing the point.

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  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Ok to be clear.  I think going into debt with eyes very wide open in order to buy RE can be a good idea.  But there is risk involved some of it obvious and some of it not so obvious as I alluded to.   

    If you find properties that are actually good deals- for example ones you would be willing to pay for with your own cash if you had enough and you have the wherewithal (via savings, other income, lines of credit, etc...) to deal with the tough times then move ahead with REI via debt.

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  • Gene Cook
    Residential Real Estate Broker · Penn Valley, CA · Member since 2014 · 14 posts · 2 votes
    10y
    Originally posted by @Jeff B.:
    Originally posted by @Marcus Johnson:

    J Beard
    Case2 works great if everything goes perfect and no large expenses like a roof or a renovation takes out your NOI. More rentals=more probable expenses, less rentals =less expenses on average. Oh and the probability of more vacancies.

     well said :)  Many here at BP seem to be focused on building portfolios as if the number of properties is an extra measure of success; but case2 is how it can be done.  

    BTW: the NOI almost always gets an impact of you take some action :grin:

    Personally, I'm into MFUs directly for the reasons you list; less to maintain and less impact of vacancies.   I'm measuring my success by the cashflow  and c/c returns.

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  • Gene Cook
    Residential Real Estate Broker · Penn Valley, CA · Member since 2014 · 14 posts · 2 votes
    10y

    I have to disagree. Not well said at all. All arguments about scale, risk and leverage aside;

    THE RISK of repairs vacancy etc. associated with any on one property or "door" is going to be the same assuming all other factors are the  same (of course no 2 properties will exactly alike but for the  sake of argument let's say they were).

    Given that, the chance of negatives happening are going to be the same for any one door just as the chance of positives (steady renters , low repair costs . increase in value) are going to be the same.

    Of course the total numbers of incidents with 10 properties is going to be more than 1 property ( in fact on average 10 times as much)  but the gross income is also times 10.

    The discussion about whether to leverage or by how much and how many properties to own is an entirely different one. But please lets not abuse common sense or logic  

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    10y

    @Chris Virgilio

    There are two kinds of debt -- good debt and bad debt.  

    The bad debt is the consumer debt used to purchase consumables and depreciating assets.  Food, clothing, automobiles, vacations are all examples.  Anything that has no value or is quickly used up before the debt that bought that thing is paid off.  This is the bad debt that you want to avoid.  It can come in many forms such as credit card debt, auto loans, home equity loans, even those horrendous payday loans and auto title loans.

    Good debt is any debt used to generate income or to increase your net worth.  Real estate is generally an appreciating asset, so real estate debt is generally good debt.  Even better if the real estate debt is for purchase of rental property.  If you purchase carefully and use debt wisely, your tenants will pay off the real estate debt leaving you with a free and clear asset generating rental income each month.  Student loan debt is also considered good debt if it secures you the education you need to get a better job and/or higher income.  

    Don't take this too literally.  Not all real estate debt is good debt.  For example, real estate debt is bad debt when the real estate debt is used to purchase a non-performing, non-appreciating property. You have purchased a liability, not an income producing asset.  

    Congratulations on becoming debt free, but now learn how careful management of debt can actually boost your credit score.  Having no open credit lines depresses your credit score.  Credit scores are used for so many things other than securing debt.  Your auto insurance policy premiums may be higher if you have a low credit score or no active credit history.  Telephone companies charge a high initial deposit when you have no credit history.  Landlords that will rent to you are hard to find when you have no credit history.  If you are applying for a job that requires you to be bonded or have a security clearance, you may not be offered a position with no credit history, even if you are otherwise qualified.  

    I agree with Dave Ramsey up to a point, but I also agree with a previous post that said Ramsey's target audience is really the individual who uses consumer debt irresponsibly and will never change his behavior.   Credit cards (more than one, fewer than five) used wisely should be an integral component of a responsible personal financial management plan.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    There is good and bad leverage but also good and bad TIMING in an assets cycle to invest.

    When I look at an investment I am thinking of not only how to buy the investment but the many ways I can exit the investment successfully and make a great return.

    Historically in commercial different asset classes go up to a certain cap rate and lease rate per sq ft and then go down again over a certain amount of years. When cap rates gets really low and per sq ft is high along with rents the lenders who have been giving loans for 50,60 years know the cycles and warning signs. When the metrics get that overheated there is nowhere to go but back down again losing value. Over time due to inflation the next down cycle numbers will likely be above the previous cycle recovery.

    I like debt when it is used at the right time.

    I know friends that bought many houses in 2009. They were quality areas for 900 in rent for 60,000. They bought 10 of them putting 20% down.

    Today those houses are worth 120,000 on 1,250 in rent.

    600,000 in equity upside.

    If they paid cash in 2009 and bought 3 houses for cash at 180,000 they would have 180,000 in equity at a 360,000 valuation versus 600,000 in equity at a 1,200,000 valuation.

    When the market cycle is ripe leverage is good and it doesn't make sense to wait. When you do that you get some properties throwing off great returns and others throwing off just okay numbers.

    My friends still buy in a up cycle but only when it's still a deal based on their metrics. If not you wait. When times are right buy 8 and when times are overheated maybe you buy one all year instead. The other alternative is to move to a different asset class where the cycle is in a more advantageous place just starting to recover.     

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  • Luke Burgess
    Investor · Laramie, WY · Member since 2015 · 7 posts · 0 votes
    10y

    I love this discussion! My parents raised me the Dave Ramsey way, NO DEBT! But reading Rich Dad was a " a ha" moment.  It comes down to Debt on Assets and Debt on Liabilities. If you get credit cards make sure you pay them off every month and good luck. Oh, make sure you wife is on board with what ever you choose. 

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  • Brent Seehusen
    Investor · Orange County, CA · Member since 2014 · 137 posts · 96 votes
    10y

    There is a lot of strange advice on this thread.  If you are focused on acquiring real estate there's absolutely no reason to mess with credit cards.  Mortgage lenders weight credit card use much lower on their modified version of the FICO score.  They don't care.  What they want to see is that you have been responsible with the debt that have had.  No late payments is really all that matters.  They don't care about credit utilization or hard pulls.

    Having no debt will help you immensely because it will keep your debt-to-income ratio (DTI) low when you do borrow to purchase real estate. Having at least a 2 year history at your current job is also important. The last thing that will help you is savings. You need to be able to put 25% down plus have 6 months reserves saved to cover your payments.

    Don't be confused by all these people saying you need to have credit cards to boost your credit score in order to purchase real estate.  They are distracting you from the real things you should be focused on:

    -Save money

    -Always pay your bills on time

    -Keep a steady job history

    Everything else will fall into place.

    1Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Gene Cook:

    I have to disagree. Not well said at all. All arguments about scale, risk and leverage aside;

    Given that, the chance of negatives happening are going to be the same for any one door just as the chance of positives (steady renters , low repair costs . increase in value) are going to be the same. 

    Let's try that again.  Common roof, common exterior walls for painting, common plumbing, common driveway, common trash, common yard and in some cases, common water.  As to vacancies, in 18yrs, having more than one at a time has never occurred and infact only experienced one per year.  I attest that if your vacancies are out of control, a) your mismanaging the tenants and b) don't know what you're doing.  Other than just selling, if one actually operates a buy&hold property, over time you learn how to retain tenants.

    Business 101:-  "It's easier to keep a customer than it is to get a new one".

    0Reply
  • Grant Huggins
    Real Estate Investor · Ardmore, OK · Member since 2015 · 13 posts · 7 votes
    10y

    In your own words thus far in this thread, you describe being debt-free as a celebration (“Yay!”) and debt with phrases such as: “scary thought”, indescribable reluctance, “fear”, “mental/emotional hump”, need to “keep ourselves out of trouble”, etc. You obviously have done life with debt and now just tasted life without it. I encourage you to follow your heart and not just your head.

    I believe the answer to your question will be determined by your world-view. What is your source of truth? If you believe accounting principles are truth, then using leverage, OPM, debt, or whatever you want to call it is smart. If you believe the Bible is truth, then perhaps you should seek out what it has to say on the subject. My own conclusion is that the Bible does not prohibit debt, but never describes it as positive nor depicts it as God’s way of providing (described as a curse in Deuteronomy and bondage in Proverbs).

    I attempt to do life (which includes business) in the manner in which I believe God has promised to bless, and have never been disappointed.

    Congratulations to you guys becoming debt free! Merry Christmas!

    1Reply
  • Dawn BrenengenBusiness Member
    Moderator
    Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Chris Virgilio I was just reviewing my debt spreadsheet today, and noticed that I am $665,000 in debt, and I couldn't be happier.  $650k is mortgage debt (I own six homes), 7,500 is our car at .9% interest, and the other is $7,500 of my husband's student loans, also sub 2% interest rate, part of which will be forgiven in a year once he completes his 10 years of service in his job.  

    Consumer debt sucks, but using credit as a tool is awesome.  I have rewards credit cards I use for as much as I can.  I pay them off each month, and I earn at least $2000/year in cash rewards (FREE MONEY!).  The mortgages are going to be paid off when I retire, and the rental cash flow will fund my retirement.

    Dave Ramsey is great for working yourself out of a debt hole, but once you are there, learn how to build your investments using some leverage.

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  • Darrell Shepherd
    Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
    10y
    I didn't read every post on this thread, but wanted to chime in. The biggest advantage of RE investing is the leverage (and tax benefits it creates). Without that, it doesn't out perform the stock market over the long term. If you hate debt, form an LLC, create income there and start borrowing in the LLC with no personal guarantees. Keep your leverage at 50% instead of 70%. All kinds of ways to do stuff, but paying cash for houses doesn't make much sense to me. Even doing flips with cash. I have 10 going right now, $0 of my money in $2mil worth of property. I'm not worried about loss because I have enough cash on hand to cover the surprises. The thing about radio money experts is that it's a one size fits all thing, and that doesn't work for everybody. Dave knows this, but won't say it. He'll come close when some high net worth people call in, but he still gives the same advice in the end. Bottom line is, there are plenty of people out there with a lot of debt that aren't W-2 income earners. It cracks me up when my credit score goes down when my card balances go up even though they get paid off every month. Its just not the same when I max out my HD card buying appliances for several houses as some guy making $60k/yr with no assets racking up a credit card buying clothes and dinners he needs to finance. You've done well. Consumer debt is bad. Over leveraged investments are bad. Hell, I pay cash for cars and boats, but I finance all my houses as much as possible. Intelligent use of debt is one of the fastest ways to wealth out there.
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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    Sigh..I hate to always be the guy taking a dump in the punch bowl. I wonder if Dave Ramsey takes credit cards for all the stuff he sells? I'm guessing yes. I never get the DR mantra of "OK to have a mortgage but nothing else" since I figure that precludes investment property. If anything, one should live as close as for free in the primary home and spend funds on performing assets. Personally, I have found that if you try to always direct money towards more money, its hard to go wrong.

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

    Edit: Yup, Dave takes credit cards. Shouldn't he limit purchases to debit cards? I kid on Ramsey, as there are a lot of people that are totally out of control and can use his "folksy" wisdom, but at the same time he makes a killing selling a "system" that isn't really his but is mostly just common sense.

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  • Robert Martin
    Real Estate Investor · Norfolk, VA · Member since 2015 · 6 posts · 3 votes
    10y

    Dave Ramsey doesn't take credit cards for the stuff he sells.....I'm just saying. 

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  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    We have zero consumer debt but we have and use several credit cards. We mostly use a cc that gives us cash back for using it. We make about $1000 tax free money every year just by using the cc on our normal everyday items. We pay the bill every month and never carry a balance. We also use cards that give us zero percent interest as long as they are paid off in a certain time frame, Home Depot and lowes. Basically, we take that money and invest it. We make money using the money that hd and lowes lets us borrow.

    Hope this helps

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y
    Originally posted by @Robert Martin:

    Dave Ramsey doesn't take credit cards for the stuff he sells.....I'm just saying. 

     Uh, what? If you try to check out anything from his web site you are brought to a page where you can either pay by debit card, bank draft, or pay pal, which allows you to use a credit card. 

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  • Perry Ivy
    Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes
    10y
    Chris Virgilio congrats on being debt free!! I too am a dave Ramsey fan, but I have used debt to buy property. I have made lots of money in real estate and without a doubt the most I've made was when I paid cash. I bought a house for $3,000 cash that needed some work, through creative strategies I arranged repair for nothing out of pocket. I did the same with a mobile home. The house I live in now was an old burned out shed/horse barn that I remodeled using cash and it has saved me thousands in rent. With all that said.....I have multiple loans and have a credit card that I don't use. Dave's way, nor mine will work for you, but you can find a way that will :)
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  • Robert Martin
    Real Estate Investor · Norfolk, VA · Member since 2015 · 6 posts · 3 votes
    10y

    So, if you go to the website, click on the "Debit card policy" and read it, it'll tell you that Dave doesn't accept credit cards. "Never have, never will". Again,  I'm just saying. 

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