Dave Ramsey is Wrong: You DON’T Need to Be Debt-Free to Hit Financial Freedom

by | BiggerPockets.com

The other day, I ran across this article: “Case Study: How to Replace a $70,000 Job Income Using Rentals (for the Math-Averse!).”

I don’t know why, but the article hit a nerve with me since it implies you need to be debt-free to hit financial independence. I’m going to offer you a different perspective based upon my personal experience. It involves taking on debt, grit, and Dave Ramsey.

Now, just in case you are saying to yourself, “Who is this dude giving me advice,” let me offer some background.

I started with a beat up-vacant-triplex in 1998 and slowly parlayed that first property into more than 100 units today. The property looked so bad, it made my girlfriend cry. My entire story is featured in the BiggerPockets Podcast Show 86.

I’m still buying (based upon my initial goal of buying one cash flowing property a year) until my kids enter college.

For instance, I just closed a 11-unit this month. Classic value play. Took me 10 years to buy it since the darn seller kept telling me it wasn’t for sale. Suddenly, it was for sale in October, and he had to close by the end of the year.

Go figure.

So don’t send me hate messages. I’m no late night “something for nothing” guru and wish to establish some credibility.

Oh, Allison, Managing Editor at BiggerPockets, suggested I elaborate on the comments that I made in the thread. Send hate mail to her instead.

[Editor’s Note: Don’t even think about it! I’ve set my spam filters to weed out hate mail. 😉 Only send me messages with puppy gifs (or genius real estate content ideas, of course).]

My entire portfolio is built on debt — that nasty four letter word that makes the Dave Ramsey congregation hiss.

Related: What is a Debt-to-Income Ratio (DTI) and How is it Calculated?

I never made more than $50,000 a year after tax when I started in real estate. I had to ninja my way to wealth through leverage, seller carry backs, and equity repositioning.

If I followed The Gospel According to Dave, I’d be debt-free after selling my first triplex in order to pay off more than $40,000 in credit card and auto loan debt acquired as a result of a carefree youth. Instead, I tax-free exchanged that deal into two more duplexes.

Let’s be clear. Dave Ramsey is awesome at getting you out of financial trouble. Just be careful when he tells you to pay cash for real estate or sell your rental in order to complete his 7-step program.

buy-properties

One More Thing…

Why would you take advice from a failed real estate investor whose only advice to a new real estate investor is always pay cash? Umm, not all people have the means to pay cash for properties like Dave.

We don’t know all the details. From what I can gather, Dave Ramsey had a multi-million dollar margin call on his $4M real estate portfolio, and the rest was history.

Now he is deca-millionaire celebrity who brags he only pays cash for real estate. The classic riches-to-rags-to riches hero’s journey.

Was the debt the problem? Or was the person taking on the debt and the structure of the debt a problem?

Just a thought.

All I know is debt, used wisely, is a nice four letter word. It is a tool that allows you to amplify your wealth. In my case, it allowed me to pay off all my credit card debt when I started my real estate journey along with building multiple streams of income in the form of rental units.

I had two pieces of debt with Countrywide Financial.

I had a big piece of debt with Lehman Brothers.

The banks got foreclosed on, and my loans were sold while the properties that held the loans continued to cash flow after debt service, even when the values dropped below appraised value.

Today, Bank of America owns the first two, and US Bank took the latter before I refinanced it into better rate and term with a friendly local bank.

During this same real estate collapse (the ultimate test for my debt strategy), none of the banks would loan me money. At the time, I had 64 units and continued to cash flow due to the fixed/non callable debt structure.

I was annoyed.

Here I am cash flowing $200 a month here, $300 a month there, with all these units carrying great debt — yet no banker would loan me a dime.

All the people who took on too much bad debt wanted to rent from me after losing their homes. But I couldn’t buy any more properties since the bankers were hiding under their desks. If debt is such a bad thing, why do you think I wanted to take on even more good debt during the worst real estate collapse in our lifetime?

From what I can gather, the point of Erion’s post is “no debt” is smart and the fastest way to replace $70,000 in wages is to own 10 free and clear properties. I’d like to offer a counterpoint.

Related: The Dave Ramsey Dilemma: Should Real Estate Investors Really Avoid Using Debt?

Let’s Call It the Smartest Leverage Strategy

If you are employing the smartest leverage strategy, you will never let your loan to value exceed 70% based upon a conservative appraisal. Sure, the loan-to-value will be higher when you initially purchase the property. But you never pay retail for a property if you are buying correctly.

Here’s all you need to know. You can buy a property today at a 80% loan-to-value and then push the value up so it is worth more within a year, and henceforth, it sits at a 70% loan-to-value with some advanced ninja investor techniques.

Ideally, if purchased and managed correctly, your mortgage payments will be paid by your rockstar tenants who, in turn, bring your loan-to-value ratio down to 50% or so in 10 years.

You don’t do this by paying extra on the mortgage. Nope. You want the excess cash from all your hard work managing your portfolio to enhance your lifestyle and cash reserves today.

This makes investing fun.

Or, if you are a freak like me, you take the excess cash to buy even more cash flow.

The ideal scenario is to let the power of rising rents, coupled with debt outsourcing to tenants, replace your fixed living expenses in 10 years or less.

Buy and hold cash flowing real estate is the IDEAL investment.

I stands for income in your pocket after all expenses, including mortgage.

D is for depreciation — the greatest tax benefit ever created. This is the only write-off where you don’t have to spend money to get a deduction.

E is for equity capture as your tenants pay down your mortgage while you create even more equity via value add or buying below market.

A is for appreciation. I’m in a slow growth linear market, so it is not something I focus on. Historically, appreciation has run the same as inflation per Robert Schiller’s extensive research.

L is for leverage. For 20% down, you control 100% of all the benefits of real estate. If you pay cash, you lose this wonderful tool and tie up all your money in one single transaction.

The smartest leverage strategy requires debt. Yet, if your loan to value is 70% or less, I would venture to guess it is pretty hard to get into trouble — especially if your debt coverage ratio (DCR) is 1.25 or higher.

find-a-mentor

What is DCR?

It is the amount of income after all expenses that can cover your mortgage. Since your net operating income (NOI) already reflects the taxes and insurance on your property, you do not use the PITI to calculate this. Remember, PITI is principal, interest, taxes, and insurance.

DCR is the following:

NOI ÷ Mortgage Payment

In Erion’s article, the investor with the mortgage received $600 per month in NOI. Divide this by the mortgage payment of $430, and the DCR is 1.43.

In other words, 143% of the mortgage is covered from the monthly cash flow.

That is one fat DCR. Most business bankers want a minimum of 1.2 to 1.25.

The number one caveat with the smartest leverage strategy is you better know what you are doing AND know how to properly run a rental portfolio OR know how to manage the property manager.

Now, let’s use the smartest leverage strategy to replace your $70,000 salary since this is the part of the article that caught my attention in the first place.

Most people think you need more properties to acquire more income. I believe you need to view this in terms of units instead of properties.

In Other Words, Quit Focusing on Properties!

Every unit you purchase becomes a unique piece of cash flow that helps you diversify your income stream and service the debt.

Got a 4-unit? You have four pieces of cash flow. This is four times safer than owning a single family, where you only have one source of cash flow.

Next, replacing $70,000 in W-2 or 1099 income is actually about $50,000 per year after all Federal and State taxes plus FICA and Medicare. For 1099 income, you need even less due to extra self-employment tax.

This assumes you are single with no dependents, reside in my high tax state, and don’t contribute to your retirement plan.

So let’s reframe this to requiring $50,000 a year in take home pay, or $4,166 per month.

You could easily cover this by focusing on small multifamily deals in the 4-15 unit range, where each unit provides $150 a month minimum. I shoot for $200 per unit. So, let’s be conservative.

Now, all you need is 27 units. Doesn’t this sound better than the 34-35 properties that Erion mentions? There are countless ways to do this — 14 duplexes, 7 four-plexes, you get the idea.

Structured correctly, your real estate income will be tax-free due to the interest expense, deprecation strategies, and treating your real estate venture as a business, where you are classified as a real estate professional under IRS guidelines.

By the way, you better have the right CPA for this to work since the difference between tax optimization and avoidance is about 10 years in prison.

As you embark on the smartest leverage strategy, you want to focus on 5+ unit properties with commercial loans that amortize over 20 years and the interest rate is fixed for a minimum of 5 years.

Most business bankers will require at least 20% down and want to see a DCR of 1.2 or higher, as I mentioned previously. Some bankers may want 25-30% down. It definitely pays to shop your deal.

Moreover, if you have no experience managing rentals, they may require you to hire a professional property manger and/or a partner and a LLC. This not only protects Mr. Banker; it protects you.

Keep in mind, in the 5-unit+ multifamily space, the banker loans on the property and the cash flow. Not you. This is a critical point compared to single family rentals.

If the deal does not make sense, you won’t get approved and you will be forced to find the right deal that fits the banks parameters. As you get better at this, you can refine your search for deals where the banker is almost begging you for more deals.

Again, Mr. Banker loans you money on the property and the cash flow. Not you. Afterwards, he looks at your balance sheet, annual income, and credit score. This is why it makes sense to keep your day job, 401k and IRA, while maintaining decent credit. I always cringe when people cash out their 401k or IRA to raise money. It makes it harder to qualify in the long run if you wish to build a portfolio of more than 10 units.

Once you have replaced your take home pay with all these units using the smartest leverage strategy, guess what? Your loans balances are paid down considerably.

Related: Used Wisely, Debt Can Absolutely Produce Wealth: Here’s How

Remember those 20-year commercial loans?

The balances have easily dropped by almost 40% in 10 years. You could refinance those loans for even a lower payment (due to the reduction in principal) and give yourself a nice raise for all the trouble, or you could reposition the equity for more units and even more cash flow.

Note how I didn’t even factor in appreciation. If you get lucky and push the appreciation needle higher via value plays, the loan-to-value could be less than 50% after 10 years.

succeed-vs-fail

The Smartest Leverage Strategy is Not for Everyone

If you are debt averse, then go ahead and follow Erion’s plan. It is a solid strategy. Both of these scenarios allow you to achieve a million-dollar net worth and replace your earnings in 10 years or so.

I haven’t run the numbers, but feel it would take longer to replace your take-home pay under the debt-free strategy since you are paying off about $800,000 in mortgages and all the excess cash flow is being plowed back into the mortgages.

Feel free to correct me if I’m wrong.

The debt-free strategy reminds me of the path followed by the Dave Ramsey sect. You live on rice and beans and drive a beater car as you beat down the mortgage debt on your rental portfolio. You are forced to keep your job as long as you have the mortgages and focus on the day where you can scream “I own 10 homes debt-free!”

Under this exact same scenario, I could obtain $1M in equity in my market by slowly building up a $3M portfolio under the smartest leverage plan. This equates to 50 units or more, where the loan-to-value runs about 66%.

You could improve your standard of living each and every year as long as you still live below your means. Save the extravagances for later when your real estate cash flow more than exceeds your pre-tax salary.

Plus, the appreciation and tax benefits are three times higher, as well as the inflation induced rental income gains. Imagine 50+ tenants working hard to pay off your $2M in mortgages because you are willing to offer them the best product at the best price. A true win-win.

Best of all, you get to spend the excess cash flow today while keeping your day job.

Picture what a few extra thousand dollars a month of ta- free rental income would do to your life assuming you were able to pick up 10 or more units over the next five years.

Can you say renting a beach-front million-dollar villa in Mexico for a week in the dead of winter like I do each year? Beans and rice taste way better on the Mexican Rivera.

[Editor’s Note: We are republishing this article for the benefit of our newer members.]

What do you think? Is it better to own 50 units with reasonable leverage or 10 units free and clear?

Let’s discuss below!

About Author

Cory Binsfield

Just some maverick entrepreneur who set a goal to buy 10 duplexes in 10 years or less as a side hustle back in 1998. Hit the goal early and decided to buy more. You can find me at Tentomillion.com

110 Comments

  1. Douglas Larson

    Great contrarian article from Cory!
    I have used a hybrid strategy of leverage and debt-free real estate but I think Cory’s title is a little misleading. Dave Ramsey has the best advice for most Americans simply because most Americans understand finance, real assets and leverage at a junior high level. What Cory is describing is phD level and while it is attainable for many people, most Americans cannot or will not gain the knowledge, resources and network of people needed to achieve Cory’s business model.

    I have financial freedom, and I have about 1 million bucks leveraged at very low interest rates. I only have 8 SFR rentals and 2 have mortgages but they all cash flow 80K per year and I have time to flip and wholesale a bit. It takes organization and attention to detail to make sure all the moving parts are working properly. Not everyone can run a business efficiently and effectively. Most Americans don’t even balance their checkbook and they need Dave Ramsey! Oh, and they are also the same people who rent my houses. 🙂

  2. Curt Smith

    I recently quit my day job because we bought in good areas that appreciated fast, REFI’ed out half enough for another rental. Given this topic I feel:

    – buy in good areas so your LTV increases quickly. IE avoid debt on rough areas because your safety margin will not increase, because in my looking at other landlords portfolios their rough area houses did not appreciate, ours did.

    – Going in DSCR above 1.8, our deals are 2.0 and above. We’ve figured out how to buy good areas but so cheap vs the rent our DSCR is great.

    – Now days the banks make sure you have plenty of equity, tnx to 70% LTV loans.

    – Gobble up all the under 6% investment debt at the above numbers as you can get!

    • Keith Hebert

      Curt, Those are great returns!
      Are you investing in out of town deals or do you happen to live in a great market? If out of town, would you mind sharing markets to look in or a source for finding those markets? I’ve just been buying locally about 1.5 DSCR. Where do I go to find 2.0 DSCR?
      Thanks,
      Keith

      • Curt Smith

        HI Keith, I asked every investor in my local REIA how far they’d drive, got back 45 min max. Guess what, I drive 1hr + to avoid competition. I then discovered how to find pockets of good jobs then I discovered pockets of growing jobs. A symptom of growing blue collar jobs is no rental inventory. Sooo buying in areas of growing jobs then advertising means I take a reservation fee before the rehab is finished. I never show a finished and empty rental, never.

        Long story, but, why I firmly believe in showing during rehab. It weeds out the PIAs who complain, filters for the die hards who want that location so bad they’ll give me a money order for $1100 before seeing the carpet or vinyl. Honest, my last completion the carpet and vinyl wasn’t yet in.

        To answer your Q: we buy in smaller towns, 10 min to the freeway, 30 min to GROWING jobs, ok house, 3/2 optional garage, always a fenced back yard because wee love dogs (no pits, but love all other dogs because other landlords are turning them away). I look for long term hooks, where they can’t move away. 🙂

        Recent all in ranges from $70k to $90k, rent ranges from $950 to $1275 making for typical cap of 13.5 and if debt DSCR around 2.0 because we can still get rental loans for 4.75-5% and 70% LTV but rehab is out of pocket. What helps DSCR is the all in LTV is way lower than 70% buying LTV, since I had to self fund rehab. Sooo this may help you understand why I have such high DSCR. :-\\ But when I used hard money to buy and rehab, then REFI out my DSCR was still >1.8. I admit, that we’ve fine tuned finding pockets of a distorted market where houses are too cheap and demand for rentals is too high. This won’t last much longer, then as we’ve done about 4 times now, we will completely change our business model. REI completely changes strategies every 18 mo at the longest. Realize this and jump ASAP. 🙂

        I just uploaded to my files area a PPT of how to build a high performing rental portfolio.

        https://www.biggerpockets.com/files/user/sweetgumga/file/how-to-build-a-high-performing-rental-portfolo

        • Cory Binsfield

          I’m digging your model. A lot of solid advice for investors including me. I allow dogs as well. Pet owners make great tenants 90% of the time and most landlords won’t allow pets.

        • greg ngai

          Great article. Hi Curt, intrigued by your reply to it and info on “how to build a high performing rental portfolio”. The link you provided didn’t work. How may I obtain the info? And how do I find these markets? I’m in san jose,CA. It seems crazy challenging to cash flow here! Thanks in advance. -Greg

  3. Christopher Neeson

    This is close to what I share with people close to me.

    You mentioned -Never let Loan to value exceed 70% and tenants should pay it down to 50% in 10 years.-

    This is close but I’ve done better, as I’m sure you have as well. This is a starting point but I’ve set my targets a bit more refined.

    It has become clear to me I need to find properties that can in turn pay themselves off in 6 years or less with rental income and a 70% vacancy rate.

    This allows me to obtain a 10 year or less ballon mortgage that can easily eliminate 65% or more of the interest you might normally pay out.

    On something like $137,000 Loan this could save me $50,000 in interest.

    On one thing like a $527,000 purchase that could save me $240,000 in interest. Can you see the appeal.

    Other then that I completely understand your insight and I’m well aware of the benefits it has.

    My other big calculation is making sure any construction costs or rebuild or repair costs needed don’t stick my over that 70% LTV.

    Its a tough thing let me tell you, because after that I need to find 30 year amortized lending with a 5-6 or 7 year ballon. In which case I target properties with rental income that can pay those balloons off at least 2 years early.

    This system works, and it cuts out at least 80% of the potential real estate available on the market. Which is a great thing because that’s just that much less digging I have to do to find golden potential.

    If I can weed out %80 of the market just based on it’s ability to pay for itself completely in under 10 years based on rental income. I have in turn saved my time and effort. I’ve made my forward progress more certain and less risk.

    Those are the only things I’ve altered based on your layout, and I know for a fact your layout works. I utilized it on my 1st 6 units. The 16 units in the past year though have fell in under my alternative plan and it’s working out quite nicely.

    Thank you for sharing !!!!!! This is what I try to explain to everyone and you have made it so clear.

  4. Jerry W.

    Cory,
    I do not recall having read any article by you before. I very much like your model. I am afraid that rentals in my area have never cash flowed enough to net $200 per unit per month for me. I use 15 year loans so that cuts down a bit on cash flow. Over the last 20 to 23 years I was in a real estate investment group and we slowly added properties. Three years ago I bought the remaining investors out and went on a buying spree that focused probably too much on buying whatever I could on good terms instead of cash flow. Historically rents and values have risen slowly but consistently in my area. My debt is triple what it was 5 years ago, but with 15 year mortgages they are paying down principal fast. I took some chances and stripped the equity out of several properties in order to buy more rentals. I sold 3 properties this year, but added a 4 plex and and another SFR. As my local economy is headed downward I now will work on fixing up properties and paying down debt. I have a mortgage that will pay off in 3 years then several will pay off in 7 years, then hopefully all will be paid off in 10 years doing snowballing. Of course if properties keep dropping in my area I may just go on another buying spree.

  5. Travis Good

    The way I see it is, Everytime you pay off a loan, you have just givin yourself a raise.
    So in my case I am working on my first flip with money off of my HELOC. I feel great about the SFR I just bought and think I should be able to walk away with at least a 15k profit in a few months. Now I also have a car loan of $15k and for the next 4 years am going to be paying $366 a month for it.
    My plan was to give myself a GUARANTEED and COMPLETELY PASSIVE raise of $366 per month for the next 4 years by exchanging my 15k flip profit.
    Where else can I exchange $15k and get immediate, GARANTEED totally passive income of greater than $366 a month?
    Not trying to start and argument, just asking where and how you can beat that?

    • Cory Binsfield

      If I were in your shoes, I would reinvent the $15,000 for permanent passive income. I would also weigh the interest rate on your auto loan relative to your cost of capital and more importantly your expected return on your reinvest.

      Whenever I want something that increase my monthly expenses, I look for a way to pay for it with the cash flow from an investment. For example, I picked up a sweet deal on a used BMW after I figured out how to find a small multi family to pay for it. The loan on the car was paid off in 3 years or so while the building continues to provide passive income. It’s like a perpetual ATM machine that needs to be serviced periodically via management and maintenance.

      Just a thought….

    • Brad Handy

      Travis,

      The problem with your math of saving $366 every month for four years is that paying down the principal is not profit. The ONLY profit is the interest you save. For a car loan with a decent interest rate, you probably have around $34 of your payment going to interest and $332 going to principal.

      Your $15k exchange would be earning you $34 per month profit.

      The rest improves cash flow, but should not be considered profit.

      I have a vehicle loan at a 2.19% fixed interest rate that I am not in any hurry to pay off.

  6. stan pace

    Even though I have a massive amount of debt from purchasing real estate, I agree with Dave’s advice. It takes a very astute, experienced and disciplined person to end up with a positive result in the long term from creating wealth with debt.

  7. james davis

    dave ramsey was in real estate in a ‘big way’ and got over invested and had some financial issues, so he’s overcompensated his thought process due to that fact. Does not take too much higher level math to understand the positive leverage of borrowing at around 5% and making 8-10% or greater on the rental return.

  8. bill W

    Good read. I invest solely in commercial real estate partnerships and usually have different partners on each deal. We always have at least 70% LTV when we buy the property all with proportional recourse so the risk is minimized individually. I agree with a lot of what Dave does obviously not all. There are many RE investing strategies out there. I live by this one alone if the worst case scenario were to happen IE my tenant goes bankrupt I cant find another one, and can’t sell the property for a 30% lose. If all of these things were to happen and I am not bankrupt with my kids on the street I am good. RE Leverage can be awesome on the way up but a bitch on the way down. As far as making 15k on the flip and paying off the car to give yourself the car payment as passive income, that sounds great but is not realistic. I used to do flips and quickly found out that 15k profit was reduced by about 40% after uncle sam and the state got through with it. This is the reason I turned to long term REI where the tax breaks are awesome I love depreciation. One big thing I learned from Dave was never finance anything that loses value IE cars.

  9. You need to remember the audience Dave Ramsey goes after: Middle class, W-2 status folks. That’s the only scenario where living on Ramen noodles until you’re debt free makes any sense at all. I don’t care what Ramsey says…..if the asset you purchase with debt increases your cash flow, it’s good debt. I heard Ramsey’s show one night and literally burst out laughing. He and Orman are cut from the same cloth.

  10. Cory. No way this all happens without a huge dedication of time and effort on your part. Can you entertain us with some stories of the times that you have struggled and how you kept your spirits up and moved forward and not given up?

    • Cory Binsfield

      Darryl, the journey was definitely not easy. Not as epic as Homer’s Odyssey, but definitely filled with some major setback and big wins. Throw in a dose of luck and I somehow managed to cobble together this portfolio. I will ponder your request for future blog post?

  11. Rick Santasiere

    Cory, great article. At first it seemed like you were blasting Ramsey for his shortfalls, but reading the entire article shows that you were simply trying to prove a point. There are so many methods to REI and debt. I, personally HATE debt, but realize I need to use it to make more money. When, I am finished though (and when I say finished, I mean done building my portfolio), I will be paying down debt, simply to be able to support myself and allow for my legacy to live on with my children. I love having “low cost” debt, but there will be some time in my wealth building career where it will no longer be as advantageous to borrow. It always makes sense to use leverage properly and hold some assets in cash (maybe a few properties with no notes), just to limit risk for when the downturn hits, because a downturn ALWAYS hits. Dave Ramsey does cater to the audience you mentioned, but he does have a pretty decent following for a reason. I, tend to side with you on your belief, but also hold the Ramsey theory as my “end game” solution so that when I decide to travel the world with my wife and take up hobbies that don’t earn me any $$, I can do so without a second thought. Thanks again Cory for sharing your insight!

  12. Bernie Neyer

    Cory’s article is interesting. Leverage however, works both ways, and if you ignore that by playing it down, you could find yourself bankrupt. Now motivated self starters will bounce when they hit bottom, but a lot of other people don’t, they just go splat.

    In Kansas there is a saying among farmers, better 320 clear than 640 not. This is to say, that debt free allows you more freedom, is a shelter against the vagaries of the market, it is the closest thing to cash and we all know cash is king.

    Leverage when used properly can allow you to do things you’d never be able to do if we just saved for it. But is that really what Dave Ramsey preaches about? He talks mostly about consumer debt. He even says that having a mortgage is okay so long as you’ve purchased a property you can afford. He cautions about taking on debt that controls your life. All of the calculators and spread sheets on Bigger Pockets help you see if you can afford the debt.

    I believe it was George Soros who said that he didn’t purchase anything he could pay cash for, as that allowed him to have the greatest income with the most freedom. I’m not a Soros fan, I think he is an elitist and a socialist, but his word rang true when a banker told me, that everyone who gets a loan from the bank is actually working for him. Hmm, something to think about.

    • Cory Binsfield

      Debt is definitely a double edged sword and I agree completely with your point.

      Got a kick out of the Soros comment along with the banker comment. Soros used massive leverage to juice returns in his hedge fund. He also leveraged other people’s money by charging a fee of 2% plus 20% or more of the profits he made on his investors money.

      I like to view bankers as partners. I guess I’ve never thought of myself as working for the banker. All I know is that Lehman brothers banker who was working for me ended up losing his job when his bank went under.

  13. Cory,

    Awesome. Nice to read my exact story. Works for me. Putting your hard earned money out in front of you (leveraged rental property) is always a great way to pay for an expense…purchase rental to pay for I don’t know…a Ferrari. Lol

  14. Cory, One of the best articles, that I’ve seen for some time, on BP. I felt like I was reading my own business plan! This has essentially been my path for the past 9 years, although it was an evolution for me, starting from somewhere closer to Dave Ramsey’s strategy early on. I now own +50 units, and will likely be retiring later this year from my “day job” (and yes, with some manageable leverage). I fully plan to continue investing part time, while enjoying life a little more. This strategy can be complex for new investors, and is best suited for the more experienced investors, but it has absolutely been the best REI strategy for me personally. To each his own…but this strategy can be a fantastic path to freedom. I am living proof. Cheers!

  15. Virginia Schroeder

    Enjoyed reading your article and agree with your strategy. I have 3 duplexes and just purchased a single family home as a rental last year because the demand for single family rentals is so high in our area. But I think I may be looking for a 4 unit after reading your article.

    • Cory Binsfield

      Hard to go wrong with a quality four unit. I’ve found my 1 bedrooms rent faster than my 2 or 3 bedroom units as well. Something to consider as you analyze your market to determine which size units fits your market over the long term.

  16. Cory Binsfield

    I would read Tom Wheelwrights book Tax Free Wealth. It offers a broad overview in a simple and refreshing read compared to most books on taxation.

    Amanda Han at bigger pockets wrote a book as well and you could follow her as well as listen to her BP podcast interview.

    The number one question to ask a CPA is “How many real estate clients do you work with?” Then ask them for detailed questions that fit your situation.

    Just make sure they are a CPA versus a tax preparer. I’ve found you also need to be proactive with your CPA by asking lots of questions and letting them know your vision for your future so they can guide you on your way.

  17. Alex Craig

    Dave is good for those who can control their own compulsions to buy “stuff,” which represents most Americans. Debt is necessary in most business, especially the individual investor. I know it is necessary for my real estate holdings, my Turnkey Business and restaurant. Like any other business, if you make silly debt decisions, it will fail.

    Good article.

  18. matt s

    would be interested in your take on current market and if it causes you to deviate from your plan of buying a property per year? I too had the plan to buy 1 SFH per year for 15 years. Increased home prices in my market have caused me to re think this and look for other semi local markets.

    • Cory Binsfield

      I been through a number of cycles now. When things got hot, it forced me to drive for dollars, knock on doors and network. I have no experience in a cyclical market like Ca, Az, or Nv. Therfore, beware of my advice.

      All I know is I buy for cash flow. No cash flow no deal. There is always a deal out there. You just need to be patient and work for it.

  19. Christy Greene

    Dave Ramsey never claims to be a financial guru. His tagline is “Giving advice your grandmother gave you, only we keep our teeth in.” It is basic accounting and basic math. However, he also says that it is only 10% knowledge and 90% behavior which translated into habits.

    He continues to be popular and in demand because people have only become Less patient, Less self disciplined, and MORE entitled. Most people can’t handle easy credit. Most people know you pay more for pay day loans, car loans, and any kind of loans but they want what they want…NOW.

    Its not really about math. It’s about character. Show me your checkbook and I’ll know what is important to you.

    Dave Ramsey is NOT wrong. He continues to be successful because MOST people won’t change. They will keep getting back on the debt band wagon. The individuals who truly become successful is by doing a character check because if they truly want to achieve their goals, all their motivations and decisions will be made in accordance to that goal.

    I have seen wealth through debt management and through the “cash is king” model. It is different for everyone because everyone has different motivations and circumstances.

    To say “Dave Ramsey is wrong”, is foolishness. Millions of people have succeeded this way. If he was wrong, then he would not be the success he is today.

    Debt is not wrong. Donald Trump would not be the success he is today.

    It just depends which one is right for you. Are you disciplined enough manage cash? Do you prefer appreciation over cash flow? Are you retiring in a few years? Do you have over 30 years of working left?

    There is no blanket statement in Real Estate. The answer should be “It Depends.”

  20. Karen Schimpf

    Great article!

    People have it wrong, including Dave Ramsey. The only area Dave Ramsey does have it right is that cash is KING.

    You do not go to a bank when you need the money, you go to a bank to leverage your money (cash). Banks lend to people who have cash for the down payment, closing cost and RESERVES.

    I had a financial planner who sold his home in California and took all of the proceeds to purchase in cash a $2MM franchise. The franchise had difficulty the first year and the owner needed working capital to get him through the tough patch. His new business was not cash flowing and he had no liquid assets.

    The owner told me he was being offered by another lender a working capital program that would cost him 30% in interest. This program would pull the payments from his checking account daily. To me that would dig him a hole faster. My recommendation was to either find a group of investors quickly or sell the business.

    If the owner had leveraged his money with an SBA loan, he would not be in this predicament. He would have been able to purchase the franchise, get working capital and have additional reserves for the difficult times.

    Cash is king as a leveraging tool.

  21. Brad Lohnes

    Thanks for the article, Cory. In particular, thanks for the DCR. Although “obvious” (most good things are once you become aware of them), I didn’t actually have a good way to measure cash flow in my portfolio. I have been using raw dollar amounts. I have just updated my spreadsheet that tracks my portfolio with DCR and now have something to aim for.

    Many thanks. 🙂

  22. Chris Field

    While I don’t disagree that DR provides financial advice for the equivalent of financial alcoholics, I would like to throw in a word of caution.

    Every time their is an upswing like now people get all excited about debt. When the market comes back down as it will in a few years or so a number of the newly successful explode in spectacular bankruptcies. Last go around in 08 I saw one with $60m in property implode.

    So while leverage is valuable and necessary if you want to grow to any size, it’s also rather dangerous. Most people that have stuck around threw market cycles keep the mortgages and life style inflation in check.

    Imho a good ltv ratio on an apartment complex is 30%-50%. Sexy no, crash resistant yes.

    What we have now on the investment side is a large new generation of owners that have never experienced higher interest mortgages. If events outside of the Feds control force an interest rate increase it will decimate the commercial market.

    Imagine all those smart push the market value of the property people with their 80% ltv loans getting a rate adjust from 5% to 10%. I can the numbers don’t work most of those properties would be cash flow negative. Just because banks are greedy now and want to push commercial paper doesn’t mean it’s a good idea.

    That’s my concern over the next 5-10 years.

    • Curt Smith

      Hi Chris and others who have mentioned DSCR as a valuable metric to determine whether to buy a deal or not or to measure risk in your portfolio.

      IE a DSCR of 2.0 means your NOI is 2x your debt service. IE $800 mo NOI and your debt service is $400/mo. This means that rents can crash to $400/mo and you will break even. This is what our last few financed rentals are running ~ 1.8 to 2.0 DSCR. And is my minimum criteria for SFRs and commercial deals as well.

  23. Chris Field

    Lastly I blame the Fed for this, the market is saturated with liquidity and because of the Frank Dodd Act it can’t go into residential real estate like it did a decade ago. Now it’s in the less regulated commercial market. Throw in rentals being sexy at the moment and you have the makings of some inflated valuations .

  24. Samantha Belinkie

    Cory, thanks for the article! I’m currently stuck in beginners paralysis – can’t seem to figure out that first step to take me from where I am – a first time homeowner of about two years, to where I want to be – having purchased my first investment property. My plan had been to continue to pay extra on my mortgage until under the 70 LTV ratio (currently at 72.5%) and then figure it out – but realize that might be a way to procrastinate on taking that next step. Hence, this part of your article particularly stood out to me – “Here’s all you need to know. You can buy a property today at a 80% loan-to-value and then push the value up so it is worth more within a year, and henceforth, it sits at a 70% loan-to-value with some advanced ninja investor techniques.” I would love to learn more about how to do that. Maybe those advanced ninja investor techniques could be the subject of your next article. Would love to learn more!

    • Cory Binsfield

      Ninja investor techniques are definitely too much for the Dave peeps! Seriously, if you are stuck, ask yourself if paying down a mortgage is worth it? The return you get is basically the interest rate on the mortgage. Leveraged and invested correctly, a rental will return 10-30% per year.

      Lastly, how much does your house pay you each year? If you lost your job and couldn’t get a loan due to a paid off house while being unemployed, does that sound safe to you?

      Just some thoughts to consider. The key is cash flow.

      Maybe I will write a post on Ninja techniques. Good idea!

      • Great discussion. From personal experience I can tell you that owning 5 rental properties free and clear is better than juggling 33 leveraged rental properties for the same monthly cash flow. With 33 properties leveraged you are just running around foaming at the mouth trying to keep a handle on everything and the risk is magnified plus the main benefit of all your efforts goes to the Bank LOL. Forget that noise. Debt Free rental property is the way to go man. So what if it takes a few years to get there….

  25. Brandon H.

    @Cory Binsfield. Thanks for the article. I’m very glad you wrote this article as I’ve been looking for a while on this topic of investment leverage vs. Dave’s Philosophy. I remember on one of the Josh & Brandon’s podcast , they would love to have Dave Ramsey on the show for a …challenge. We’d love to see that happen @Brandon Turner ?

    I’m not too newbie, but also not too experience and trying to work my way for passive income like many of us in this forum. I’m kind of Hybrid approach like some other members. Leverage is great, but I don’t want to over leverage for the “what if” situation.

    Any idea or good rule of thumb , percentage leverage vs your asset even it is a good “debt” ?

  26. Keith Weigand

    I think there is a failure to understand the audience. Dave Ramsey’s program is primarily for individuals/families. For that, he offers great advice. No debt, emergency fund, more priority on paying off 18% CCs then driving a nice care etc. etc. A majority of people need this advice.

    Investors are different. We do this as a business and the rules change. 60-70% leverage works best for growth. However, my underlying ‘family’ practices are in line with Dave (we have zero consumer debt, emergency fund etc.)

    BTW, you speak of Dave’s failure as a red flag to avoid anyone who has failed. I would recommend reading biographies on the most successful people in the world. Over 80% had at least 1 major failure. Failure is the best teacher. I would rather go into business with someone who has had a major failure then one who has never failed. Too many reasons why to list here.

    • Christopher Neeson

      It’s sad when I listen to Dave Ramsey like most people watch Jerry Springer. Over 100 episodes later and I still can’t believe the people he baits. Daves theory sounds like a safe little nest to keep the birds safe. Add into his equation the devaluation of the US currency over time, as well as price inflation and you might want to second guess how safe you will be.

      When I need motivation to hear how well I’m doing I listen to Dave Ramsey, you have hundreds of thousands of people following the Dave Ramsey plan. I’m choking them through the airwaves like it’s a mid day TV show yelling at them letting them know how stupid they are don’t do it….

      Yes there is an easier way, yes there is a better way. You can create $5,000, $10,000 even $20,000 a month cashflow within 3 to 5 years using leverage. It does become easier and easier the more assets you acquire. To be honest , holiday shopping is more difficult then investing into investment income properties.

      It is hard for me to support Dave Ramsey. My wife and i have been investing for 3 years now. Our goal was to create $400,000 annual cashflow by 2020. That’s 7 years to go from zero cashflow to $400,000 annually. Current balloon mortgages come due 2018 and 2019 and at that time we will be cashflowing $268,000 annually roughly. That puts us $132,000 shy of our target in 2020. Still the fact that we have been able to achieve success says enough.

      Why struggle to pay down debts and live below your means, when you can simply invest in cashflow to cover your wants?

      Good luck to everyone, I hope everyone achieves their goals in 2017 and thrives every year after that.

      • Keith Weigand

        Point made Chris. You are an investor. That works and I agree with you. But for the W2 person, having all the consumer debt that Dave refers to will kill them because they will never get ahead and if they loose their job, they are screwed. Investors should never loose their entire cash flow like loosing a job. It’s just the audience difference. Happy investing!

        • Christopher Neeson

          Being that I had roughly $3800 a month in bills just in the recent 2013. I developed a plan to create my outgoing income into incoming cashflow. It was a fairly simple process, and even while in debt with 2 vehicle payments, $22,000 in credit card debt, as well as $40,000 in student loans. My debt was outrageous. To top it off that wasn’t considering food, insurance or any other bills.

          The key to getting out of debt is to replace your debt payment with cashflow. Once you’ve started to create cashflow you can then start paying more down or investing more.

          As of 2013 I was completely upside down. Today in 2017 I am on track to have reveresed my fortune.

          The biggest clue comes from one of the biggest players in the game Robert Kiyosaki. If you want to buy a Bentley or a Ferrari you need to create cashflow to do so. It should never eat money from your income.

          Once I found a strategy to accomplish the process of creating cashflow it became very clear. Now I do 5 and 6 year balloon mortgages on properties that pay themselves off in 3. High cashflow, $3,000 to $5,000 in cashflow a month on every purchase. Acquiring real estate and covering my expenses. Not by paying down debt or saving. But by spending and using debt to grow cashflow.

  27. Erik Lee

    I did just this to get where we are at. We are still into leveraging to purchase more properties for cashflow. We have purchased a 27 unit MUR, and 11 unit MUR and 2 commercial buildings with 4 units in them in the last year.

    I purchased one of the commercial buildings in order to purchase a Tesla. I put the cost of the car (approx $100,000) into the building as a down payment and the monthly cash flow will pay for the car. So “free” car…not quite, but it feels like it and when I sell the car I will have a nice raise of $1000 per month from the cashflow that I get to keep!

    I agree with what Cory says. It took a lot of work and a few years to get to the point that I could rationalize the car decision. We have always plowed extra cashflow back into new purchases but I like the thought of enjoying the “beans” on the Mexican Riviera approach to REI.

  28. Thank you Cory for an intriguing article. The comments are also interesting, and I appreciate your frequent responses to them. Especially since the bulk of this comment are a couple of questions.

    The DCR looks like a good tool to judge the quality or risk of a cash flow investment, but I want to make sure of the terms used to calculate it. DCR=NOI/(mortgage PMT)
    So the mortgage payment is NOT in the NOI calculation?
    NOI = rent income – management fee – taxes – insurance – repairs – etc. Is that correct?

    You mention the greatest caveat with your strategy is “know how to properly run a rental portfolio or how to manage the property manager”. I would love a follow-on article about that. Can you suggest any resources on those topics until your next opus?

  29. Cory Binsfield

    You are correct. Think of NOI as all expenses before you add debt. This helps you analyze a deal irrespective of how it is financed and then compare the deal to other properties. The NOI and DCR metrics are mainly used in multi-family investing (5+ units) and I feel you should analyze all properties in this manner. This way you treat it like you are valuing a business.

    For resources, BP podcast and the BP books are solid. The Millionaire Real Estate Investor by Gary Keller and Jake and Gino’s Wheelbarrow Profits are highly recommended.

    I’m not an official BP blogger due to time constraints. However, I have some new ideas for some blog posts based upon the comments here. Property management and advanced ninja techniques are a few that come to mind. My best deals come from investors who are frustrated with their property managers.
    I like the term “opus”. Clever!

  30. Erion Shehaj

    Cory

    Looks like I’m a bit late to the party! 🙂

    I missed this article completely until one of my clients (a BP member) pointed it out.

    Your article is very well articulated although there are 3 main issues with your argument:

    1. Your premise assumes that the “smart leverage” strategy is one and the same with Dave Ramsey’s real estate investment ideas. It is not. Dave Ramsey rejects the entire idea of using debt as leverage to acquire investment real estate and advocates for 100% debt free investing. The strategy I laid out uses leverage to control and acquire a higher asset value and then opts to pay off the debt as a way to increase income while reducing risk.

    2. “Why would you take advice from a failed real estate investor whose only advice to a new real estate investor is always pay cash? Umm, not all people have the means to pay cash for properties like Dave.

    We don’t know all the details. From what I can gather, Dave Ramsey had a multi-million dollar margin call on his $4M real estate portfolio, and the rest was history.”

    Actually, when he first got started, Dave Ramsey followed your parameters almost to the letter. Right before the rug was pulled out from under him, he owned $3M in real estate with $2M in debt. So he did have more than 30% “equity” in his portfolio. His DSCR was solid. He did have the same commercial loans “who only look at the income and not your credit”. His “smartest leverage” strategy crumbled when those commercial banks decided to call the notes and made them due and payable immediately. So if anything, the Dave Ramsey story is an illustration of the pitfalls of carrying million dollar loan balances around. You don’t have to take my word for it:

    https://www.youtube.com/watch?v=r1NJzEYARlM

    3. Finally, the biggest issue with the smartest leverage strategy is that in Mark Cuban’s words, Everyone is a genius in a bull market. I am skeptical about any strategy that’s proven to work only on the “flowery” part of the cycle where interest rates are in the single digits. What happens to the cashflow numbers when inflation rises and rates rise to stem it off?

    Ultimately, this is a question of risk tolerance. If your risk tolerance lets you sleep well at night carrying multi-million dollar debt balances, then the strategy laid out works well and more power to you. But let’s not pretend that conservative investors who don’t have the same risk tolerance are simpletons who belong to a cult.

    • bill W

      But let’s not pretend that conservative investors who don’t have the same risk tolerance are simpletons who belong to a cult.

      Well said Erion. Everyone assumes you have to be some Einstein and use “ninja techniques” to be a successful REI. No one technique is right for everyone.

    • Chris Field

      Yeah saw a number of business’s fail in the last crash because banks called in loans and lines of credit.

      Vacancy rates went up, rents went down, houses stopped selling etc.

      I was on another now defunct real estate board their used to be a guy on it who had about 12 Ferraris always used to brag about his $125k service bills. Always said why have a million in cash invest it banks will always lend!

      Well in 2009 they stopped lending, he had balloons due. Lost it all.

  31. Cory Binsfield

    I think you missed the part where I survived the greatest real estate crash since the depression. This is not about theory, it is about real world results. When I started, banks were loaning me money at 8% and everyone was buying tech stocks. Real estate was for simpletons who didn’t watch CNBC and knew how to day trade and get rich quick.

    Today, everyone wants to own real estate. All I know is you need to buy cash flow and underwrite deals as if they can survive the next correction. This means locking in fixed rate debt and keeping your loan to value ratio reasonable.

    Going into the crash. I had 70% leverage and none of the banks called my loans. No clue why Dave’s bankers could simply call him and say, “Hey, pay us off in 30 days or we foreclose.” This sounds like line of credits versus commercial and traditional Fannie/Freddie fixed mortgages.

    We will never hear the real story behind Dave. Everyone likes a failure to success story. You know what I mean? The classic boostrapper who becomes a multi millionaire and you be just like Dave by purchasing his courses, attending his retreats and subscribing to his online courses.

    Your article was great. Just wanted to point out that you can achieve the same result faster with smart leverage. Of course it is not for everyone. Just wanted to offer a counterpoint.

    • Chad Carson

      Cory,
      I think you and Erion both have good points. I also had a portfolio of similar size and leverage to you going into the Great Recession. but most of my debt was with private lenders and sellers, not commercial banks.

      But to Erion’s point, I think 2008-2011 could have been much worse. Yes, we survived. But there were unrealized risks that many people are not talking about. And Erion’s free and clear strategy would have ultimately addressed these risks better.

      First, you did have adjustable rates if I read right. Rates went down during that period, so your risk of increased payments was never realized. Second, rents stayed steady or went up. A major deflationary period (which almost happened) could have wiped out those puny 1.25 DCR cash flows. Third, have you REALLY read all that fine print in your 30 page commercial mortgages? You would be the first I have met. If they wanted to call your loan due, likely they could have. This is Especially true if your cash flow had changed like the scenarios i mentioned above. I am glad your lenders did not call your loans due. But perhaps the difference in result between your (and my) situation and Dave Ramsey’s was less about him being a simpleton and more about a chance and a friendlier lender. After all, even Goldman Sachs, Bank of America, and GE had to get emergency funds from Warren Buffet to pay off their loans in the last crisis.

      So, I think your low loan to value ratios and overall plan are solid. But it is not comparing apples to apples in terms of risk with Erion’s. But any plan has its own problems, as this debate has pointed out. Thanks for sharing your story.

      • Cory Binsfield

        I completely agree that going into 2008 with debt free properties is safer. Clearly, the smartest leverage is not for the risk averse. My point is you can grow wealth faster and retire sooner with smart leverage.

        From a risk standpoint, if you employ leverage wisely, you need to make sure you buy for cash flow and monitor the call risk on loans along with a host of other factors.

        All my conventional loans were and still are fixed. For the commercial loans, similar structure with balloons after 5 or 10 years along with some fixed 20 year with no balloon-my favorite.

        If you were to analyze the banks that were bailed out, they were actually leveraged more than my 1.25 minimum DCR. Even with Dodd Frank, banks can still lever up more than a typical commercial real estate investor with 20% down.

        Big fan on Warren Buffet. Yet, even the grand master uses leverage in the form of insurance float to juice up returns when he buys companies. His biggest problem now is too much cash and where to put it to maintain a respectable growth rate.

        Thanks for the comment and the epic guest post on the Mad Fientist. That was the best explanation of the tax benefits of real estate I’ve ever seen.

      • Chris Field

        On some loans if your ltv increases past a certain number the banks can force you to bring the ltv back in line.

        I *think* that’s what got Dave. They don’t call the note they simply say Dave you need to come up with $200k to bring this ltv under 75%.

        I heard of some banks in the last downturn raiding a company’s deposits to do so. Personally I never keep any money in a bank I owe money to.

        • Erik Whiting

          If I recall correctly, the reason Dave’s banks called the notes is these were “flipper” notes that had 90 day terms. This gave him quick access to vast amounts of cash to tie up and flip houses. But the terms were terrible in that if the market stopped booming he had to cover those notes in full.

          I’ve been a big fan of Ramsey since 2008. This was AFTER I got into a bunch of real estate debt. Fortunately, I too survived the 2008-2009 crash because my market is not very hot to being with, so when it gets “cold” its more like a sniffle vs. the flu. Values dropped maybe 10-15% and have since recovered. I had mostly 30-year fixed conventional mortgages…a couple of commercial loans that were LTV 50% of less and didn’t have any “call” or balloons on them. So worst case, my rates would have gone up and I’d have had to feed the alligators for awhile until I sold, refinanced, or the market recovered.

          Looking back on it now, I have to agree I don’t see how I could have gotten to where I am today without loans, but I’m very hesitant to say “Dave is okay with debt” even for a personal residence. He says that’s the one debt he doesn’t “yell at people for” when they call in, but you can tell he would never advise borrowing to buy real estate.

          Here is how I understand his “save up and pay for real estate” advice. He talks about cash flowing into each one by banking profits from the past. Assuming a $50,000 property and having $1000 per month one can bank…slightly over 4 years to get the first property. For that kind of property, I’d expect to net at least $500/month after all expenses paid. With no mortgage, one could now bank $1500 per month to buy the next $50,000, which if we follow Dave’s plan of buying appreciating assets will probably cost around $60,000 (40 more months). At that rate, you’d be growing your “empire” by about 2.5 – 4 houses per decade for the first 20 years. Very conservative, obviously.

          I’m trying tax lien investing right now as that has a very low entry price and can be done for cash easily in my market. Paying $1000 – $2000 per lien. Wait a year, if the owners don’t redeem, I get the property. So far haven’t gotten any keepers but I’ve only done it for 2 years. We’ll see how it goes.

  32. Johnny McKeon

    Mr Binsfield,

    I listened to podcast show #86 and you mentioned you served with the 75th Ranger Regiment and after separating from the U.S. ARMY you used your VA home loan benefits to get started in Real Estate.

    Well, I just separated from the U.S. ARMY on September 2016, after being stationed at FT. Lewis, Washington with 2nd Stryker Brigade Combat Team, 2nd Infantry Division as an 11B. I happened to move back to sunny Arizona with my parents and I want to follow your advice, footsteps and take advantage of my VA home loan benefits to get started like you and purchase a 4plex that cash-flows at the very least, $100 per unit ( I’m finding it challenging to get $200 per unit with MLS properties using VA). My vision is to purchase 8 income producing assets (ideally 8 4plex’s) that will provide $3,000 of passive income. I have 40k in savings with a 774 FICO with no debt other than a Phone bill, car insurance, groceries, BP plus membership and as long as the numbers work and the property cash-flows I’m on track to purchase my 1st 4plex this year.

    You mentioned in your article you like to make sure your properties have a %70 LTV.
    So, my questions are:

    1. When I use my VA loan with %0 down is that wrong, dangerous, or not wise? Or is it good just to get started but unsustainable?

    2. Why is %70 LTV safer vs VA %100 LTV if both properties are cash-flowing?

  33. Cory Binsfield

    Johnny,

    Glad to see a fellow vet thinking about real estate. Your strategy and goals are spot on.

    “You mentioned in your article you like to make sure your properties have a %70 LTV.
    So, my questions are:”

    1. When I use my VA loan with %0 down is that wrong, dangerous, or not wise? Or is it good just to get started but unsustainable?

    Go for it. Ideally, if the property cash flows with 0% down you are in great shape. Make sure you do a 30 year fixed to lock in a historic low interest. This is extremely safe as long as you live there and manage it right. Once you build enough equity, refinance out and use the proceeds for down payments. If VA allows it, you could go back and get the VA loan. You just need to verify this with a VA lender and live in the new place of course.

    2. Why is %70 LTV safer vs VA %100 LTV if both properties are cash-flowing?

    The only reason 70% is safer is if real estate prices collapse and you need to sell quick. Gettimg to 70% LTV Is tough when you start out. Over time it becomes easier as you find better deals due to experience plus principal pay down by tenants and possible appreciation. I don’t bank on appreciation unless it is forced by my repositioning strategies.

    I like your plan. Now go hack a 4-plex. Hooya!

  34. Jennifer Ross

    Until our recent sale, we had owned our own 3,400 square foot, 5 bd, 2 bath home, free and clear. We didn’t pay off the mortgage, we paid cash the day we bought it. Granted we had a somewhat unique situation that allowed us to do that, (equity in the previous home) but it can be done. On one salary. With 11 children. True story.

    We also own, free and clear, several of our rental homes. The reason many people follow Dave Ramsey principles is because they’re Biblical. Christians are to “owe man nothing but to love him” and “the borrower is servant to the lender.” These are Biblical principles, as is Dave Ramsey’s advice.

    The issue for Christians isn’t if one needs to be debt free or not for financial freedom, the “issue” is to follow the LORD. 🙂

  35. Ironic how so many real estate bloggers on this site criticize Dave Ramsey, yet you use his name in the title of your articles just to attract people to click on your blog….So really Dave Ramsey is the whole reason anyone bothers to read many of these blog posts…interesting and ironic.

    Completely unnecessary to use him for your own benefit. You could have easily titled this, ” You don’t need to be debt free to hit financial independence”

    Hypocritical.

  36. Kendall Claxton

    So, what happens when someone takes your advice and they don’t make it? They already have debt, they read your article and think great ill just take out a loan and buy a property! They didn’t know the property had structural issues or they get screwed over by a contractor or they cant find tenants or the tenants they have don’t pay. What happens then? I think you need to be careful getting people to play with fire and I don’t think I can follow biggerpockets anymore after this advice.

    • Jason Hinton

      That is my question too. I’m currently reading Brandon Turner’s “The Book On Rental Property Investing” and just like the author of this article all he talks about is cash flow. Buy a property with little money down, save the cash flow, buy another property, etc etc before you know it you’re a millionaire. What I don’t hear anyone talk about is cash reserves. What happens if your tenant doesn’t pay and it take months to evict him? Without cash reserves how do you pay the mortgage and get through the tough times? I see the risk of covering the expenses as greatest when someone is first starting out and only has one or two tenants.

      • Erik Lee

        Jason. I agree…but if you can quickly get past this stage you do reach a point where multiple units that are all cash flow positive dramatically lowers your risks.

        What is not being mentioned is that if you have a property that has a healthy cash flow then 1) it must have either been purchased at a discount 2) the purchaser must have put a fair amount of sweat equity into improvements or 3) the debt on the property has not caused it to be over leveraged to the point of reducing the cash flow.

        Therefore to many of us that read this advice it makes sense and has worked very well for us.

      • Curt Smith

        Hi Jason, Your comment re reserves struck a chord. I was working on ignoring the above ranters that seemed to have gotten up on the wrong side and thankfully your comment on an important topic reserves hits a good topic.

        As I understand the stories, the landlords who blew up in 2005-8 incurred rapid vacancy due to no-doc loans turned many renters into wishful thinking owners, emptying rentals. These landlords had 100% loans and low DSCR, a high portion of the rent went to debt service. They had no ability to absorb the vacancy since their break even point was not low enough to keep their units rented. They had to file BK.

        Landlording is just a business where we need strategies to ride the ups and downs, needs for 5 roofs and HVACs all in the same year (as luck would have it happen). I completely agree with Jason’s voicing of a major issue that does not get talked enough about. I also think Kendal was struggling with a lack of discussion and advice re reserves as well.

        I quit my day job last July thanks to having built a rent income stream that was 2x my day job net. Poof I quit. But only now 9 mo later I’m thinking about reserves. I do have plan A and B and C where I suspect many landlords do not.

        So I agree with Erik below that BURRR (??) has worked great for me and allowed me to quit. But we need some models / math that gives us goals for how much cash needs to be set aside in a separate account for the rainy day. CFP’s suggest 6mo of living expenses in a cash account. What might a landlord plan for? For every 5 rentals, plan on 1 roof, 6 mo vacancy in one house, 1 HVAC, 2 turn overs? Just guessing.

        I also agree that experts giving advice on how to build a rental portfolio need to consider down turn reserves and strategies… For me; only do deals where DSCR is close to 2.0 or above, have some rentals with low LTV (Ramsey’ish), have some amount of cash on hand.

        • Cory Binsfield

          Reserves are critical to a successful outcome. Nice comment. I was low on cash when I started and had to use credit cards and lines as my reserves. Not recommend unless you absolutely know what you are doing.

  37. Lee S.

    It seems like people are debating based on different facts? I’m more in the leverage to grow camp, buy at a discount and make sure it cash flows keeping ltv at 70-75% or lower.

    The thought of taking on a variable interest rate or a loan/note that can be called would terrify me, and I’m a risk taker. 30 year loans with 4.5-5% rates with a solid cushion on rent to mortgage payment with plenty of reserves, I can sleep fine. We are also extremely short on housing in my area so I don’t see rents dropping or vacancies increasing much no matter what happens with the economy.

    Long term I agree I wold rather have 20feee and clear than 50-100 leveraged so maybe when I get to 20 sfr’s I’ll stick to flipping to pay them off and be done.

    • Jerome Kaidor

      I’ve made my peace with variable rates – nothing else seems to be available for multifamily. In general, I feel that the same forces that cause high interest rates will also tend to let you raise the rents. Or I hope so….

      I am totally with you on balloon payments. I have never bought anything with one of those, and really wouldn’t dare. What if the lending landscape is crappy when the note becomes due?

      I have a friend to whom this actually happened, and she had to sell her 8-plex ASAP.

  38. Kurt Buchert

    Good read but the obvious answer is that Dave Ramsey’s advice is dead on for probably 98% of Americans. The author of this article is speaking to the 2% of us that have high risk tolerance, invest in real estate, & are willing to leverage ourselves in a smart way to achieve wealth. I own over 50 units & couldn’t have done so without debt, but I am currently starting to de-leverage myself. I see both sides of the coin & there is no 100% correct way for everyone. I listen to both Dave Ramsey & real estate investors that love debt. Debt is very dangerous but very lucrative if done carefully.

  39. Cory Binsfield

    Kurt, I agree that Dave is great for the vast majority of Americans. I just have issues with his anti-debt mentality. My approach is definitely not for the faint hearted. Like you, I’m bringing down my leverage right now. The plan is to build up cash reserves for the next fat pitch since multi family is getting a bit bubbly here. Still, I can’t see ever going debt free. Here’s an article from CNBC where Warren Buffett took out a 30 year mortgage even though he could have paid cash for his Malibu home in the 1970’s. It is all about opportunity cost.
    http://www.cnbc.com/2017/03/04/the-oracle-of-omaha-is-selling-this-time-its-real-estate.html

  40. I’ve seen a lot of folks advocating paying down the mortage, but it really doesn’t make sense to put your extra cash flow back into the mortgage when the rate is only 4-5%. It’s not a liquid investment, especially a 20-30yr note. I’m sure we can all find other investment vehicles that earn at least 5%, and there likely more liquid. My properties (4 family buildings) are on 30 yr notes, they cash flow very well. I just can’t see putting the cash back into the mortgage when it’s only going to “earn” 4%.

    • Cory Binsfield

      Totally agree with you. Every time you pay extra money on the mortgage, you lock up that money in your dead equity account. Have you ever noticed you can’t get a loan with no job or income? This is the problem with a paid up house. You still need to qualify for the loan with enough active/passive income sources to tap the equity if you need it. I’d rather take the excess cash flow and invest in vehicles that earn more than 4%.

  41. Ken Seemann

    So after replying to an earlier comment, I think I have another point to make.

    Dave Ramsey is 100% correct.

    Cory Binsfield is 100% correct.

    Here’s why I think this: I’ve been through “Financial Peace University” twice–once when married when she didn’t really want to live the idea of getting out of debt, and a second time after a divorce when I needed to get control of my finances. So I understand Ramsey’s point of view–I believe–and see the point Cory is making. But they are apples and oranges. Here’s why:

    Ramsey is talking PERSONAL finance. In other words, NONE of what he says is geared toward owning a business. He never talks about buying a business, getting business loans, or anything about running a business. His advice is for the individual–not the business owner. And certainly not for a real estate investor. Sure, he talks about getting your PERSONAL HOME paid off, and lots of recommendations on how to do that, and mentions–VERY QUICKLY IN PASSING–about a second home.

    Cory, you are running a business. Ramsey’s model doesn’t apply. It’s that simple. Not only does his advice about paying cash for real estate not apply, NONE of his advice applies. So does your model work from a BUSINESS standpoint? Of course it does! No business in the world can run on a strictly cash basis. I bet even Ramsey, when he places an order with a company to print copies of his training materials, has to work outside of his rules. The printing company won’t start the work without a deposit, and the Ramsey won’t pay for the whole thing before he sees a prototype. And the answer to that is–credit. But BUSINESS credit. When he flies to some location to teach a seminar, I bet he uses a company credit card, because I don’t know of a single bank that issues a company DEBIT card. And if he puts it on his PERSONAL debit card, then good grief what a business nightmare he could get into co-mingling funds.

    So as I said at the start–Ramsey, 100% right–for personal finance. Cory, 100% right–for business finance.

    • Cory Binsfield

      Great point Ken. The Ramsey organization boasts over $150m in revenue each year. I’d imagine they have a few credit lines. They make a lot of money off their endorsed local providers program along with the show plus educational materials.

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