As a newbie with limited capital from which to begin investing, and a Dave Ramsey fan, I'm struggling with how to justify REI knowing he teaches to do everything with cash, including REI. In fact, it would seem that any strategy I'd have to consider to get started would be 180 degrees from what he teaches (I'm liking BRRRR). He went from millions to bankrupt with REI so it's hard to disregard his experience and concerns.
Any help with thinking this through is greatly appreciated!
I'd recommend listening to BP podcast #165 it discusses some of this and the dilemma of their 2 views.
if you do some digging, you can find out what Dave's situation was.
He was a big commercial agent/investor back in the mid to late 1980s, having millions of dollars of property. Then the S&L bubble burst and he ended up like so many were in the 2008-2012 period when the mortgage crisis hit.
If someone crashed and burnt during the 1980s over commercial real estate, then they were simply over leveraged and bought bad assets. Just like residential, commercial, industrial, apartments, etc you HAVE to be careful what you buy. You can't go out and buy whatever's on the market throwing caution to the wind, you have to understand market cycles and prepare for the worst while doing pro-formas.
Dave lost out, and then formulated his no-debt strategy. If you listen to his radio show, he's OK with buying properties with 20%-30% cash down and 15yr mortgages. He suggests as minimal leverage as possible. I agree that you need to be cautious, but I don't know if 30% with 15yr terms is the absolute best strategy. Do make sure you buy at a discount though, or at least improve value, that will help you in down times.
If you need everything right now, you cannot live the Dave Ramsey philosophy. His teachings are religous based not mathematical. So if you try to prove Dave wrong using Math it won't work. The teachings he preaches will make you wealthy, but may not bring you as much wealth when using leverage, so quit trying to compare. If you want to follow religous preachings then follow Dave, if you want to go after the dollar only, then follow someone else.
If you have personal debt, use DR's advice and get rid of it. But don't think that's the most important lesson he has to teach. The single most important lesson DR teaches is budgeting. Get control of your money and learn how to manage it. This skill will serve you well whether you follow the rest of Dave's advice or not.
Be sure that you have the cash reserves necessary to protect you from the unexpected. When you have 3 or 4 vacancies at once and one or more need extensive repairs before they can be rented, you are not only out the rental income, but the mortgages must still be paid.
I am completely debt-free, and have done all of my investing debt-free. I am not against leverage, it just doesn't fit with my current investment plan.
In the end, each of us must choose our own path. Each of us decides if and when to use debt, and at what level. No matter how much advice is given and received, that doesn't change.
Bugeting takes up a lot of time. Time that can be used acquiring deals and having memorable life experiences.
People that say "that latte at starbucks won't make you happy", Bull****!! Coffee and the experience at starbucks WILL and DOES make people happy and more productive, there are demonstrable physiologic and psychologic reasons for this.
Oh, dear me! If I spend time developing a budget I might not have time to stop at Starbucks. Boohoo!
Budgeting is money management. If you want to be successful in business, learn how to do it. Either you control your money, or someone else will.
And FYI, "latte expense" can be built into any budget.
I would say "shopping" at Starbucks will make one happier and is a higher and better use of time then say, budgeting :) No disagreement there. I respect that you chose your own path. Budgeting is nothing more than limiting your potential and living below your means. Lets call a spade a spade.
For example, do you enjoy eating bland rice and beans at home for every meal or would PREFER going out to a restaurant with friends and family most days? Do you prefer 1 or 3 family vacations per year? Both of us have the same answers to these questions. You say 'control your money', I say 'limiting your experience'.
@Chad Tate - great comments here for you, and I'd tend to agree with most.
I have taken the DR course and believe it is a great foundation to understanding how to manage "out of control" debt. The thing with REI is it is supposed to be a "controlled" debt. It's about managing numbers, following a schedule of debt repayment (with a positive cash flow), and staying within a budget (as DR suggests).
You'll never be debt (better DEBIT) free. you'll always have bills to pay, it's the term or length of time it will take you to pay them off that is of concern.
you can ascribe to the DR philosophy and do REI with mortgages and credit cards so long as you manage the numbers properly. for example...I use a Menard's card because I get 2% off all my purchases there...I also have a Home Depot card because they give me 5% of purchases. Right now, my discover card is paying me 5% cash back on all purchases at home improvement stores, and that total will double after August. So, instead of spending cash and paying the "in store" price, I buy on one of their credit cards (save 2-5%), then pay with my discover credit card (saving another 10%). It's not a ton of money, and that's the point. you'll win this game because you pay attention to the little amounts you can save, not the huge amounts that it costs to do business.
take the best of both strategies and create what works best for you.
Blessings.
10% of my net worth came from my cash. The other 90% came from appreciation, rent payments, loan pay downs, etc.
Dave Ramsey's advice is for people that are struggling financially and for people that are wanting to accumulate wealth using their W2 income. His advice is sound, but it isn't fully applicable for all investors.
That being said, his idea of living intentionally is absolutely spot on.
It's cool to see the different perspectives. This has been (until a few posts ago) the most concise and educational thread about cash and leverage I've seen. Surprisingly low appreciation has been shown for these excellent posts and the OP has pulled a Buehler, but oh well.
@Justin R. - awesome explanation of the risk/reward spectrum. Just saved our fearless OP 2 years of college.
@Sylvia B. has lived the cash only investing way. A rare feat indeed! Congrats! I'd rather have 10 free and clear than 40 leveraged up.
A 'used to be' completely debt-free colleague, now turned to the dark side a little bit with RE debt is @Julie Kern. Hate for you to miss a DR debate, Julie :) Welcome!
I got tired of the maximize my ROI rat race long ago. Turning over skinny margin rocks, hoping for the phone to ring from an indecisive seller that wants the moon got old way back. I'm reducing my higher interest mortgages in the meantime.
I like naps, I like fishing and I like golfing badly. I do a lot of all 3, BECAUSE I have little debt. When deals that make sense again return, I'll be a waitin'. With cash. If rates are still low, I'll leverage.
Because I don't have consumer debt payments and I take 5 minutes a month to budget, it'll be my choice. Cheers!
You seem to equate budgeting with not going to Starbucks. Why can't you just put Starbucks in your budget, since it literally makes you happy?
More importantly, are you truly suggesting that budgeting is not a good use of your time? Your budget is your financial plan. Without a plan, you are taking a passive role in your own life. Does that lead to more "memorable life experiences" or less?
I can always count on my buddy @Steve Vaughan to pull me in to a Dave Ramsey discussion :)
Yes, when we first started investing, we were going straight DR and planned to use all cash, but realized pretty quickly that even with strong capital, we would hit a wall soon.
Now we pay cash and execute the BRRR strategy and it has worked well for our first 3 properties. Our ultimate goal is to hit our target # of properties - at this point it's 20 but ask me next week and that could change - then reverse snowball to knock out the loans until we own everything free and clear.
So leverage helps us hit our goals now, then we'll use cash flow, our W-2 income and other streams of business income to knock out the debt and have the option to live off of the income of our properties.
We're actually closing on a turnkey property in the next week (figured I would throw in another controversial topic, as if DR isn't enough for one thread) and we'll be using leverage out of the gate for that one. We're doing a bit of case study to see how TK goes compared to what we've been doing.
Anyway, I am and always will be a Dave fan. He's entertaining, he's a Tennessean like me, and he has a message that most Americans need to hear - not just the ones who make $30-$40k a year. I agree with @Douglass Benson about Dave's "idea of living intentionally" being spot on. And yes, budgeting is important. If you can't create and stick to a budget in your personal finance, how are you going to manage your REI business?
So for now, I'm using leverage (but with strong reserves and w-2 income that can support major repairs, long vacancies, etc). But eventually the goal is to hold everything free and clear, the Dave way. :)
@Steve Vaughan, my sincere apologies if my lack of response from my post 3 days ago came across as unappreciative. Quite the opposite, in fact. I've been very busy questioning some local REI's, but definitely taking in all the replies.
As many have mentioned, money mgmt is rarely, if ever, taught in school while growing up (at least in my experience). Those that were lucky enough to learn anything likely learned it from home, be it positive or negative. That being said, when I became a DR follower years ago, it all made sense, and thus became one of my apparent paradigms I'm having to get over in order to learn, and ultimately act upon regarding REI.
All that being said, I certainly appreciate each and every one of you for your input and point of view. It definitely helps to hear the positive and encouraging words with regards to "good debt". I'll continue to read, ask and ultimately learn with hopes and an expectation to take the plunge into my first deal sooner than later! Thanks again to you all!!!
I would say "shopping" at Starbucks will make one happier and is a higher and better use of time then say, budgeting :) No disagreement there. I respect that you chose your own path. Budgeting is nothing more than limiting your potential and living below your means. Lets call a spade a spade.
For example, do you enjoy eating bland rice and beans at home for every meal or would PREFER going out to a restaurant with friends and family most days? Do you prefer 1 or 3 family vacations per year? Both of us have the same answers to these questions. You say 'control your money', I say 'limiting your experience'.
You say that because you have absolutely no idea what budgeting is.
Apparently you also struggle with reading comprehension. No one mentioned "shopping" at Starbucks.
Kiyosaki's podcast details the debt approach for the big 3 camps.
Orman=cut up your credit cards. (BAD DEBT)
- You're in debt because of your frivolous spending.
Ramsay=No debt ever. (NO DEBT)
- You can't get hurt if you don't play the game.
Kiyosaki=The Hungry Hungry Hippo of debt. ("GOOD" DEBT *subjective, I know)
- Give me all the debt I can get.
Cash is easy. If you got it, use it, if that's what you're comfortable with. You'll find success. Maybe not generation changing success, but success nonetheless.
Leveraging debt allows for an investor to do more with less. Know how to play the game, and you can find generation altering success. But you better know how to play, or debt will cripple you.
I can always count on my buddy @Steve Vaughan to pull me in to a Dave Ramsey discussion :)
Yes, when we first started investing, we were going straight DR and planned to use all cash, but realized pretty quickly that even with strong capital, we would hit a wall soon.
Now we pay cash and execute the BRRR strategy and it has worked well for our first 3 properties. Our ultimate goal is to hit our target # of properties - at this point it's 20 but ask me next week and that could change - then reverse snowball to knock out the loans until we own everything free and clear.
So leverage helps us hit our goals now, then we'll use cash flow, our W-2 income and other streams of business income to knock out the debt and have the option to live off of the income of our properties.
We're actually closing on a turnkey property in the next week (figured I would throw in another controversial topic, as if DR isn't enough for one thread) and we'll be using leverage out of the gate for that one. We're doing a bit of case study to see how TK goes compared to what we've been doing.
Anyway, I am and always will be a Dave fan. He's entertaining, he's a Tennessean like me, and he has a message that most Americans need to hear - not just the ones who make $30-$40k a year. I agree with @Douglass Benson about Dave's "idea of living intentionally" being spot on. And yes, budgeting is important. If you can't create and stick to a budget in your personal finance, how are you going to manage your REI business?
So for now, I'm using leverage (but with strong reserves and w-2 income that can support major repairs, long vacancies, etc). But eventually the goal is to hold everything free and clear, the Dave way. :)
Could you recommend one or two Dave Ramsey pieces that would give me the gist of what he preaches? This could include speeches/ articles / audio etc. but something under 1-2 hours. Thanks much!
I would say "shopping" at Starbucks will make one happier and is a higher and better use of time then say, budgeting :) No disagreement there. I respect that you chose your own path. Budgeting is nothing more than limiting your potential and living below your means. Lets call a spade a spade.
For example, do you enjoy eating bland rice and beans at home for every meal or would PREFER going out to a restaurant with friends and family most days? Do you prefer 1 or 3 family vacations per year? Both of us have the same answers to these questions. You say 'control your money', I say 'limiting your experience'.
You say that because you have absolutely no idea what budgeting is.
Apparently you also struggle with reading comprehension. No one mentioned "shopping" at Starbucks.
"Oh, dear me! If I spend time developing a budget I might not have time to stop at Starbucks. Boohoo!"
No one mentioned that? That is directly what you wrote, on the first page of this thread. Maybe you cannot even comprehend (or read) what you yourself wrote. If you're going to try and sound smart, don't make an arse of yourself. Have a great day!
Hey @Andrey Y. You can go to his website and get a pretty good idea of what his philosophy is.
Listen to a few podcasts as well and you'll get a feel for what he teaches.
Hey @Andrey Y. You can go to his website and get a pretty good idea of what his philosophy is.
Listen to a few podcasts as well and you'll get a feel for what he teaches.
Thanks Julie! I am watching the video on his site where he talks about car payments, I cannot stop laughing :) He is a funny dude.
If DR is right, here's a question to you BP Nation:
Has anyone, here on BP, who earned $40K/yr in their job, accumulated 20 properties free and clear in a short span of time (say under 5 years)?
I will be amazed if someone actually did this.
Outside of earning a high income, without leverage, accumulating properties is a slow game. If you want to play the game faster, you need leverage but you need to use it wisely...or the other way is have a business that produces lots of income and use that income to buy and accumulate properties.
I would say "shopping" at Starbucks will make one happier and is a higher and better use of time then say, budgeting :) No disagreement there. I respect that you chose your own path. Budgeting is nothing more than limiting your potential and living below your means. Lets call a spade a spade.
For example, do you enjoy eating bland rice and beans at home for every meal or would PREFER going out to a restaurant with friends and family most days? Do you prefer 1 or 3 family vacations per year? Both of us have the same answers to these questions. You say 'control your money', I say 'limiting your experience'.
You say that because you have absolutely no idea what budgeting is.
Apparently you also struggle with reading comprehension. No one mentioned "shopping" at Starbucks.
"Oh, dear me! If I spend time developing a budget I might not have time to stop at Starbucks. Boohoo!"
No one mentioned that? That is directly what you wrote, on the first page of this thread. Maybe you cannot even comprehend (or read) what you yourself wrote. If you're going to try and sound smart, don't make an arse of yourself. Have a great day!
Shop ≠ Stop
I didn't read all the comments so I am not sure if anyone mentioned it, but just a quick check on Dave Ramsey, he got caught up in the tax reform act of 1986. Properties at that time were artificially high because people bought at a loss to write them off on personal income taxes. Many people got caught owning properties that were underwater, over valued and could no long write them off on personal income taxes. People really took a hit and this is a reason people are still scared of RE. You can research it on your own, I just did a quick search.
To Chad: I would definitely be free of consumer debt before beginning RE investing. It will keep you from panicking and making bad decisions, e.g. renting to someone who doesn't meet criteria because you have bills due. There used to be a principle in financial management that the length of debt needed to match the life of the asset the debt is against. For example, it is OK to take out a mortgage on a house, as the house should last the length of the mortgage. It is not OK to refinance your house and take out cash to use for a vacation. The vacation memories will be long gone but the debt will live on. That being said, it is possible to be debt free (mortgage included) before starting RE investing.
Dave Ramsey's target audience is someone who is deep in bad debt. He is trying to solve a behavior problem instead of a financial problem. You can tell by his debt snowball method instead of paying off the highest interest first(which make most financial sense). If you use his method, you should be in baby step 6 before you even thinking of investing in real estate.
@Marcus Johnson Yes, I'm quite familiar with Dave's guidelines for mortgages. I had done a search on mytotalmoneymakeover.com and thought I heard him make a slight exception one time to a caller in regards to rental property.
@Chad Tate I would highly recommend that you listen to "someone who's been there and done that." DR may be go for getting out of bad debt, but even he isn't the only person out there who can teach that. If you want to learn about REI or any other kind of investing, find someone who has boomed, busted and then built it back up. DR busted in REI, but did he get back into it? Or did he go off and do something else? Not the right person to learn from. Choose your teachers wisely, and don't just take whatever some guru says as gospel. You still have to be smarter than the person you are listening to and form your own opinions about what will and won't work in your personal situation.
All that being said, how many rich, ultra rich people have you heard of that have paid cash for everything? Not one. No companies, people or governments every get rich/wealthy by paying all cash. Every last one of them does so by utilizing well structured debt. Emphasis WELL STRUCTURED DEBT. Debt is no more dangerous than a hammer or saw or gun. It is only dangerous in the hands of someone who does not know how to use it, which DR may have been when he was doing REI, but I don't know. Why would Apple sit on $2B in cash and go out and get debt on the books? Because well structured debt is where you make your money.
Think about it. If you had $1M in cash what would you do with it? Spend it on doo-dads? Buy investment property? Sit on it? The best answer is sit on it and find equity partners out there to work with that will supply you with down payments and reserve money for your deals and you go out and get the loans. Why? Think about it from the bank's perspective. Would you want to lend someone $4M to buy properties if they had $0 in the bank or $1M in the bank? You can get 5, 10 or more times your liquid cash in loans and be much better off. Having a big reserve is the golden ticket to great loan terms and more deals. Would you want to work with an investor who was bringing a big deal to you whose personal finances were in shambles or if they were sitting on a good war chest?
Getting out of bad debt is usually the first thing that anyone needs to do in order to start making headwinds. But then you have to change who you are listening to when you grow past that advice. DR and SO are so big because there are sooo many people in America and the world that can't stick to the advice and don't do the work. So they keep falling back into the same situation and not going anywhere. If you are disciplined enough to get and stay out of bad debt then you have graduated from DR and should look for new mentors to follow. Say "so long and thanks for the fish!"
Good luck!