The Dave Ramsey Dilemma
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Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10yChad Tate there are plenty of threads on this topic of you do a search. The bottom line is everyone needs to find their balance of risk tolerance and need for fast returns. Debt is not uniformly evil but for the audience Dave reaches no debt is probably the right message. If you are an alcoholic zero alcohol is a good policy. But if you can drink responsibly social drinking is fine and even beneficial. Same with debt. If you are smart and Use Debt wisely and carefully it can be a good tool to grow wealth. If you leverage every last penny with no reserves a bad cycle will bankrupt you. You need to find your own balance rather than blindly follow any books or even this site. Good luck
81 Replies
- Lakewood Ranch, FL · Member since 2016 · 22 posts · 6 votes9yBeing a long time Dave Ramsey listener and follower, this too has been a tough thing to think about as I plan my start in RE. I would like to use only cash as I feel otherwise starts opening doors to taking on too much risk. But I can also see that borrowing some will help speed up the process. I have my primary residence paid off and am debt free. Now just saving up for real estate. A lot of it too is the mind set of being debt free. The idea of not having any weight on your shoulder. Not having a payment every month. There is a psychological aspect to it. I have to say though to Sue Anne Cho Dave definitely uses no debt even in his business. He owns his office free and clear and has no credit cards in his business. All his employees use debit cards. So the thought that you can't run a business without credit and that he would use credit is incorrect. You have not listened to him enough to learn that.
- Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes9y
Originally posted by @Account Closed:
Chad Tate there are plenty of threads on this topic of you do a search. The bottom line is everyone needs to find their balance of risk tolerance and need for fast returns. Debt is not uniformly evil but for the audience Dave reaches no debt is probably the right message. If you are an alcoholic zero alcohol is a good policy. But if you can drink responsibly social drinking is fine and even beneficial. Same with debt. If you are smart and Use Debt wisely and carefully it can be a good tool to grow wealth. If you leverage every last penny with no reserves a bad cycle will bankrupt you. You need to find your own balance rather than blindly follow any books or even this site. Good luck
I think the alcoholic analogy is perfect. Research shows that 2 drinks/day for men and 1 drink/day for women is associated with the longest life expectancy. However, if you are a recovering alcoholic, zero drinks is probably best for you. Unfortunately, if you are an alcoholic, you are unable to take advantage of the health benefits of alcohol in moderation. If you suck at personal finance you are also unable to take advantage of financial benefits of taking on debt.
Ramsey's message is tailored to people who really struggle managing their finances. If still interested, read my personal story of two different philosophies below.
One of my friends made it onto the Ramsey radio show because he paid off $90,000 of student loan debt in about 2.5 years. The wife didn't have any student loans. He and his wife both have Ph.D.'s in statistics and got their first jobs in 2011. They made about 110K/year at the time combined and rented a house for $1300/month. After this, they also waited about 2 years to get 20% down for their first house purchase, which happened in 2015.
I ended up with $56,000 in student loan debt. I have a Ph.D. in Applied Social Psychology. However, I used about $20,000 of my student loans to fund a house purchase while in grad school in 2007. I bought a 4 bed/2 bath house and rented 3 rooms to other students to pay the mortgage. When I got my first job out of grad school in 2011, I only waited about 6 months and I bought a house with 5% down. At the time of the house purchase, my student loan balance was around $56,000 with an average rate of about 5.8%. If I rented the house I purchased, it would have probably cost around $1300/month. However, even with PMI, my total mortgage payment is $665. My $42/month of PMI will be gone in 12 months and then my total mortgage will be $623/month.
In 2017, I still have $34,000 student loans and the current overall rate is around 4.8%. However, both of my houses purchases are now rentals and the rent is $1050/month above the mortgage for each. That's $2,100/month of cash (before repairs) or $1,600/month after repairs. We have about 360K of equity across the two properties. My buddy probably has about 60K of equity.
Would you rather have zero student loan debt and $60K of house equity OR
$34,000 in student loans, $360K of house equity and $1600/month of cash flow from two rentals?
Because I'm 37 and still have student loan debt, some of my friends make jokes. However, the average of my friends have about 50K in 401K and 50K of home equity, so they have a total net worth of around 100K. Our net worth is 450K and should hit 500K in a few months.
- Investor · San Antonio, TX · Member since 2016 · 30 posts · 11 votes9y
I think its important to note HOW Dave lost his millions in Real Estate. He has told the story several times, and from what I gather it was something that could happen to all of us. He had 1million net worth from equity across all of his properties, (which if memory serves me was around 4M portfolio, correct me if I'm wrong). If he made any mistakes he doesn't mention them, in fact he says he never missed a payment. Instead, he says that his credit union was suddenly bought out. His new debt owners decided that it was not a good idea to have 3M loaned out to a 26-27 year old and decided to call his loans. He sold off as much as he could but ended up filing bankruptcy (which he said he didn't really need to, but just gave up). This was probably because of non-RE related debt and bills rolling in that he accrued using the higher income which had now vanished.
I have listened to Dave for a very long time, and read a lot on bigger pockets, but this is something that I haven't seen discussed. I know I'm calling in a hellstorm on myself by asking the question, but isn't this something that could happen to any one of us? I have about 750K in mortgages (some owner financed) and if someone decided to call those loans I'd be screwed even with 20% equity. That is the terrifying part about using OPM, for me at least, is that if the lender gets in a pinch, I'm liable.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Look at your mortgage. If it is traditional there are only certain things that trigger acceleration. When the bank commits to loan you money for 30 years, unless you go into default and trigger an early payment demand, you've got that note for 30.
Skyline Properties - Investor · San Antonio, TX · Member since 2016 · 30 posts · 11 votes9y
That's what I thought, JD. But then how did DR lose his millions if that was the case? Why were his loans called prematurely?
- Investor · San Antonio, TX · Member since 2016 · 30 posts · 11 votes9y
Originally posted by @JD Martin:
Look at your mortgage. If it is traditional there are only certain things that trigger acceleration. When the bank commits to loan you money for 30 years, unless you go into default and trigger an early payment demand, you've got that note for 30.
That's what I thought, JD. But then how did DR lose his millions if that was the case? Why were his loans called prematurely?
- 9yAlex ShaughnessyPro MemberReal Estate Investor · Spring Valley, CA · Member since 2016 · 288 posts · 98 votes
If ease of mind is top priority then maybe. otherwise, leverage is the greatest wealth builder you can use.
- Multi-family Investor · Allendale, MI · Member since 2015 · 121 posts · 51 votes9ySamuel Riehn Dave Ramsey had many commercial loans that were being called because they were on a balloon. As property values dropped, he was unable to refi.
- Investor · San Antonio, TX · Member since 2016 · 30 posts · 11 votes9y
Originally posted by @Julie Haveman:
Samuel Riehn Dave Ramsey had many commercial loans that were being called because they were on a balloon. As property values dropped, he was unable to refi.
Julie, thanks for answering my question. Though I'm not sure I understand. You mean he had commercial loans that ballooned up several percent in a given year, so he was unable to make the higher payments? What does refi have to do with it?
- Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes9y
Commercial loans are typically for a shorter amortization period (20-25 years) which means they have higher payments. They also typically "balloon" in 5, 7, 10 years meaning that they are due in full at that time and you must refinance them.
- Multi-family Investor · Allendale, MI · Member since 2015 · 121 posts · 51 votes9y
if a commercial loan has a five year balloon and the value goes way down you need to come with more money if your bank does not have confidence in you.
- Investor · San Antonio, TX · Member since 2016 · 30 posts · 11 votes9y
Originally posted by @Edward B.:
Commercial loans are typically for a shorter amortization period (20-25 years) which means they have higher payments. They also typically "balloon" in 5, 7, 10 years meaning that they are due in full at that time and you must refinance them.
Ah! Gotcha. Thank you, that really opens my eyes actually. Makes sense then, to avoid Dave's debacle be careful not to back yourself into corner by using balloon's, commercial loans, or contingency clauses. I'll be reading my contracts today to ensure there is nothing funny in there.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Samuel Riehn:
Originally posted by @JD Martin:
Look at your mortgage. If it is traditional there are only certain things that trigger acceleration. When the bank commits to loan you money for 30 years, unless you go into default and trigger an early payment demand, you've got that note for 30.
That's what I thought, JD. But then how did DR lose his millions if that was the case? Why were his loans called prematurely?
You would (should) know if you have a commercial loan. It's not going to be as long as a conventional loan, it's probably got a higher interest rate, it does not have many of the restrictions of traditional home mortgages, and it's going to likely have a large reset like a balloon payoff requirement, rate or term reset, refinance requirement, etc. Commercial loans have a lot more leeway for banks but are also far riskier since the backstops that buy mortgages ie fannie/freddie don't do commercial loans. If you don't pay on your commercial loan the lender has to take possession to get whole, rather than being made whole by a backstop.
Skyline Properties - Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes9yLeverage is one of the greatest parts of REI. Sure if you have the cash have a ball and do it debt free. Some of us need to use leverage to build a portfolio. Does Dave realize we are in a 4% interest rate environment. He needs to adapt to the marketplace. You need to decide what you want though. We can't answer this question for you. Do the math and figure out how long it will take to save the cash to buy a property, or how soon you could buy one using leverage. Maybe you are fine with saving up for 5 years to buy your first property. Personally I would have debt on all my properties whether I needed it or not. I know I can earn more than 4% elsewhere with that cash.
- 9yShiloh LundahlPro MemberRental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
@Chad Tate When I talk with people about trauma and the way it effects our behaviors, I usually use the Disney movie Finding Nemo. Do you remember why Nemo's dad, Marlin, became so overprotective of Nemo? Because at the first of the movie, his lady fish and all of the eggs, except Nemo's egg, got eaten by the barracuda. Then Marlin grabbed Nemo's egg and said something like, "I will never let anything bad ever happen to you." This is a trauma response.
Dave Ramsey went through a horrible experience where he lost everything and was being hounded by his creditors (he describes his awful situation in several of his books). Then he did, as many people who have gone through a trauma do, he went to the opposite extreme and decided to never use debt for anything. Usually either extreme in most areas of life is not healthy or helpful in the long term.
Robert Kiyosaki and Donald Trump also went through devastating downturns but then learned from their mistakes and returned stronger.
I think that Dave Ramsey has a lot of great things to say to help people learn to create a budget and control their spending. However, I take his advice on investing with a grain of salt considering the trauma he experienced by going broke. In other words, I take what he says in consideration but not as absolute because what he teaches heavily leans towards helping people never experience the awful situation which he experienced. So he guides people towards security rather than intelligently managing risk.
- Investor · Ketchikan, AK · Member since 2016 · 3 posts · 0 votes7y
Hey Chad, I will look you up the next time I am in recurrent. I would love to hear how its going.
Nate Norberg
- Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes7y
Dave has good sound advise for the masses .lets face it Most people blow their money and don’t save so they retire broke . his advise is sound when it comes to getting out of consumer debt and getting a budget going . On the flip side Dave is a bit outdated in the investing world . It is impractical to pay cash for everything and never leverage . It is very difficult to get wealthy this way and takes time . Time is not like money because you can’t make more of it ! It’s fixed ,something we all have in a limited supply . I like Dave very much in fact I agree with most of his religious views as well ,but you must realize he actually made his millions on selling books and his conferences not real estate investing .
- Rental Property Investor · Tacoma, WA · Member since 2018 · 113 posts · 149 votes7y
As much as I like Dave R., he is a bit of a one-trick-pony for me. I'm glad that he's out there and I think that he helps a lot of people get out from under consumer and student loan debt. However, there is a world of difference between consumer debt and borrowing to obtain a wealth-building asset. And, I'm referring to an asset in the strictest Kiyosaki definition. That is, an asset is something which provides positive cash flow. If, and only if, an asset will provide cash flow well in excess of the expenses including the cost of financing, does it make financial sense. Most people who call in to Dave's show owe money on cars, student loans and beautiful homes. I would bet that almost everyone who became wealthy in this business used financing along the way.
- Member since 2019 · 9 posts · 0 votes7y
I’ll say this about the Ramsey approach. It feels really good not owing a penny to another soul. Imagine your income with no debt service. Play with an investment calculator for awhile and see what you can do with that income. Combine zero liabilities with a nice retirement account and paid for rentals etc, and you have arrived at a place worth aspring to. It won’t happen overnight but it will happen. For me, a few paid for rentals are much more appealing than many that aren’t. Fewer structures and tenants. Excellent cash flow, few worries = my vision of success. What’s your vision?
How about buying a duplex, living in half and paying it off fast.... Then buy another. One day you’ll find you are doing these deals all cash. Compounding interest is a force you want working for you.
Best of luck in all your endeavors.
SK
- Teaneck, NJ · Member since 2017 · 9 posts · 1 vote7y
From my understand
Originally posted by @JD Martin:
Originally posted by @Samuel Riehn:
Originally posted by @JD Martin:
Look at your mortgage. If it is traditional there are only certain things that trigger acceleration. When the bank commits to loan you money for 30 years, unless you go into default and trigger an early payment demand, you've got that note for 30.
That's what I thought, JD. But then how did DR lose his millions if that was the case? Why were his loans called prematurely?
You would (should) know if you have a commercial loan. It's not going to be as long as a conventional loan, it's probably got a higher interest rate, it does not have many of the restrictions of traditional home mortgages, and it's going to likely have a large reset like a balloon payoff requirement, rate or term reset, refinance requirement, etc. Commercial loans have a lot more leeway for banks but are also far riskier since the backstops that buy mortgages ie fannie/freddie don't do commercial loans. If you don't pay on your commercial loan the lender has to take possession to get whole, rather than being made whole by a backstop.
From my understanding, he had 30 day notes that he kept refinancing, but then his bank was sold, and the new bank did not let him refinance, which then caused his downfall.
- Rental Property Investor · Wilmington, DE · Member since 2018 · 36 posts · 23 votes7y
The Dave Ramsey method would have you buy any investment with all cash. That would tie most investors up with moving all capital into 1 property when you can split your funds into multiple investments which of course will create multiple streams of income! I enjoy Dave but IMO his no debt strategy works in nearly everything except real estate investing. Just my opinion of course! Best of luck!
@Chad Tate
- Realtor · Omaha, NE · Member since 2011 · 110 posts · 25 votes7y
I take a Dave Ramsey approach when it comes to personal finance. No CC debt, auto payments, student loans etc. It makes life a little easier in case something goes wrong.
However, when it comes to real estate I finance. I am trying to build wealth as fast as possible and saving up cash to buy property is not my best option. If someone else is going to pay my mortgage I can take a little bit of risk!
- Inspector · Member since 2019 · 14 posts · 4 votes6y
@Chad Tate
My wife and I are navigating these waters as well with what sounds like a similar view. It’s also worth mentioning he went from Bankrupt to a multi million dollar company and is a cash only real estate investor today as well.
- kelowna · Member since 2019 · 19 posts · 3 votes6y
@Russell Brazil i'm sorry if someone asked you this already somewhere in this super long thread but i was listening to Dave Ramsey earlier this week an he specifically says that the vast majority of millionaires are not created using real estate. Obviously i haven't done any hard research studies myself but someone HAS to be incorrect. His claim is that most millionaires are created by paying off your personal residence and investing in mutual funds, however the claim i've heard through BP is that most millionaires are in fact created through RE. I'm very early in my investing life and i would like to have a clear path in mind as i proceed. can you please speak to this. I find it hard to believe anyone on either side of this claim is outright lying but both things cant be true at once. any input would be great to hear.
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