Buying real estate without debt...

[Bob Ewoldt]

All, I'm new to real estate investing, but I'm good with numbers (I am an accountant). Here's my newbie question...

I listen to Dave Ramsey regularly (and I see that there are several on here that do as well), and he recommends buying investment real estate without debt. When I run the numbers on deals that I see, I see much higher returns with a modest down payment than buying with cash.

I know that there's a risk factor overall, but I can't find anywhere that says how to calculate mortgage risk into your deals.

Questions:

1. Is there a formula for risk when evaluating a RE deal?
2. I've seen people on this forum say that putting all your money into one property is risky, but couldn't the opposite also be true (that dividing your personal and business focus on multiple properties is also risky)?

[Ned Carey]

@Bob Ewoldt Lenders on commercial properties use Debt coverage ratio as one measure of risk. Calculate your Net Operating Income and divide it by the annual payments for the debt. The higher that number the the better 1.25 is typically the min just to get a loan. To be conservative you should use 1.5 or even 2.0. Of course you need to know how to calculate NOI and your actual expenses to figure Debt coverage ratio properly.

Another calculation is your break even ratio. I believe that is Before tax cash flow/ (Total Annual Expenses + Annual Debt Service) This will give you a percentage that will tell you how far off your numbers can be and still break even.

I understand Dave Ramsey's point and my personal coach Steve Cook also preaches debt free investing. However there is no question that leverage can increase returns. I believe in using debt conservatively to increase returns but not to maximize returns. It is also important to have reserves and understand hidden costs. Many "Unexpected" cost should actually be expected when you know what you are doing.

- Ned