Dave Ramsey's Real Estate Story?

16 Replies

I understand that Dave Ramsey offers "average" advice to people that don't know how to use a credit card.

But, Dave Ramsey apparently used to be a real estate investor. I did a quick google search and found that he had a "$4,000,000 portfolio by age 26", and it came crashing down in his early 30's.

Does he have a book or are there any sources about this phase in his life...about why he failed? Did he give up? Is he still doing REI?

Got this from wikipedia ....

Ramsey was born and raised in Antioch, Tennessee, United States, North America. At the age of 26, through his brokerage firm, Ramsey Investments, Inc., he built a rental real estate portfolio worth more than $4 million and became one of Tennessee's youngest brokers to be admitted to the Graduate Realtors Institute.

Ramsey's success soon came to an end as the Tax Reform Act of 1986 began to have a negative impact on the real estate business. One of Ramsey's largest investors was sold to a larger bank, who began to take a harder look at Ramsey's borrowing habits. The bank demanded he pay $1.2 million worth of short-term notes within 90 days, forcing him to file bankruptcy.

actually, dave mentions often on his show that he is still investing in real estate. he 'says' that he pays cash for all of it.

he is focusing greatly in florida and arizona as he thinks those states will come back hardest and sooner than others.

He sometimes refers to his rise and fall on his talk show. Says he got way too leveraged and lost it all.

He still likes to identify with his average caller, but I've never heard one caller that earns anything close to what he earns or is worth. His advice is right on for his paycheck to paycheck callers who owe 8 months' worth of income on their trucks.

Actually, in his books he's very specific about rentals. Pay them off or sell them. He doesn't like debt and that applies to rentals.

I believe part of this comes from the BS surrounding rentals. There's this myth that buying a property for 100X the rent will gain you cash flow and make you rich. If you believe in the 50% rule, you know this just isn't true. If you don't though, and you get swept up in this "prices always go up", "1% will give you cash flow", "cash flow = rent - PITI", "there are huge tax benefits" and similar myths promoted by groups with a vested interest in selling properties, its easy to end up with a property that sucks money out of your pocket each month. If you're struggling to make ends meet, this is an albatross around your neck. Better to not own such losers. But if its paid off, at least it has some chance of putting money in your pocket.

Now, any time I've done the math on paid-off properties, it comes out looking like a pretty weak investment. Not awful or a loser, but not that profitable vs. alternatives. Leveraging properties will net more profit for a given amount of capital. But its a two-edge sword, as many people have learned the hard way.

Originally posted by Jon Holdman:
Leveraging properties will net more profit for a given amount of capital. But its a two-edge sword, as many people have learned the hard way.

Bingo. Leveraging is the (#1?) reason to invest in real estate! I never understood this until I read about it. Buy in cash, weak roi. Leverage it, strong roi. But hey I am just stating the obvious.

Dave ended up in the dumps along with a few other REI folks I personally know. Before that tax code change. Guys like Dave made their money on selling limited partnerships on insanely over leverage real estate. The limited partners mostly highly paid professionals who needed big tax right offs bought in by paying the monthly mortgage for the owner investor.

Here is how the investors made the big bucks. First find a totally worthless rental building, the bigger the better. Buy it for what it was worth (just about nothing), next fix the place just enough to make it habitable.
Next sign leases with folk who were at least breathing, make the rent as high as believable, next go to a lender who was not being properly regulated, was allowed to lend money based on the new value of the building which was now based on a totally rented fully leased building.
Easy slam dunk deal, the investor is holding $100's of thousand of borrowed tax free money, and the limited partners paid the mortgage, plus the other expenses involved in the building. The professionals got a huge write off by owning the losses of the building, without being on the mortgage docs or owning the building.
The investor had easy management, he did not worry about collecting rent, or upkeep as the limited partners paid the freight.
The tenants never complained as most did not pay the rent anyway.
But Uncle Sam threw a monkey wrench into the deal. The new tax code disallowed loses from real estate for these professionals who earned above $125k and that is all of them.
The limited partners stopped paying the mortgage, and walked away free.
My friend had 2.6 million dollars of mortgages to pay on negative cashflow buildings. He of course also ran away with his credit totally destroyed forever, and the lenders mostly failed.
This my friends was called the S+L crisis.

Dave probably pays cash because his credit is shot to hell, my friend has a $1million judgment on his credit to this day.
Don't worry about him though, he has quite a few college rental buildings hidden in land trusts to keep the lenders a bay, he paid cash for them, he had squirreled a few of those limited partnership bucks away.

How history repeats itself.

Dennis' explanation is dead on with one exception - your credit isn't destroyed forever. You just get a better head on your shoulders about proper leveraging. A bad experience with the banking industry tends to make you very distrustful of banks.

Eve (and others)- I read Dave's book and watched a lot of his television episodes and have a lot of trust in the guy but don't personally follow everything he says. As mentioned above, Dave is strongly against debt, referring to debt as "slavery". This includes Real Estate Debt. Dave also pushes the importance of living within your means, not on credit cards, and being financially smart.

As Jon pointed out above, ROI is not the best when you pay for a property in all cash. No one can argue with that, but it is definitely safer. One of Dave Ramsey's quotes is "100% of foreclosures last year happened to people with mortgages". Very True.

So we investors can argue all day that the ROI is better with leverage, but hundreds and thousands of "investors" are flat broke right now and bankrupt because of leverage. We are not beyond getting greedy during the good times, and losing it all when things get rough. And I know I and most every other investor will say "yeah, but I'm smarter than that" but in fact, nothing is guaranteed. Dave Ramsey's approach is not just for the paycheck to paycheck people, as others have said, but rather for everyone.

So my approach is this: Be smart, don't over-leverage (listen to people like Jon and pay homage to the 50% rule), and take Dave Ramsey's approach as much as possible: have an emergency fund, create a budget, tackle (snowball, as Dave says) your credit card debt, and stop living beyond your means.

I try to live "Dave Ramsey Smart" in my personal life but I treat my real estate investment exactly as it is - with risk. I understand that I may lose it all someday (I hope not though) but I hope to pay my personal house off and all personal debt as soon as possible so if I do go broke investing, I won't be on the street or working at McDonalds. Will I be as rich as the guy who leverages his personal house at 110% and reinvests it in his portfolio? Probably not. But I'll never lose everything and still will end up successful.

Well, I'll get off my soap box now. I highly recommend Dave's "Total Money Makeover" book if you get a chance. Let us know what you think.

Excellent points, Brandon. I strongly agree.

I like to listen to Dave's commentary. He has a very sensible side and consistently speaks the truth as it applies to 80% of the population. For the reason Jon pointed out above, his popularity is due to the fact that most people are living pay check to pay check to pay off that truck which is worth 8 month's of their salary!

In a certain sense, listening to him makes me feel better about myself thanks to a majority of his callers!

"One of Dave Ramsey's quotes is "100% of foreclosures last year happened to people with mortgages". Very True."

While it may be rare, a home could be forfeited from tax delinquencies or HOA liens, even when there is no mortgage..

Originally posted by Steve Nicewarner:
It's also worth noting that a serious Dave Ramsey devotee is probably going to make a pretty good tenant. not that you can screen for that . . .

Tenant application: Book report on Total Money Makeover.

Great screening method!