Can Rich Dad Poor Dad beat up Dave Ramsey?
Residential Real Estate Agent · Rochester, MI · Member since 2012 · 152 posts · 52 votes
To borrow or not to borrow, debt free is the way to be etc etc etc.
The way I see this is a risk vs reward.
How do you decide though where the risk is to great or the reward to little? How do you decide to purchase a property with a mortgage? What are your safety nets? Do you have to buy x% discount? Put X amount down? What are you doing to stay safe?
I'm trying to decide how to approach this so any insight would help. I don't want to end up broke down the road because I over leveraged myself. But where is that line? How do you know what that line is? What should you consider in deciding where to draw the line?
Is anyone on here a buy and hold investor using all cash? If so why and what have you found to be the result? Was it always that way or did you start with leverage?
Also was the title catchy enough? I'm learning catchy title get read the rest sink to the bottom.
To me this whole 'debt' concept of a mortgage on rental property is utter nonsense. If you are paying 500 for a mortgage, 400 for taxes insurance water etc, and renting it for 2000, you are not in some risky position to suddenly get f-ed. Lost your job? Uhhh who cares, you aren't paying the mortgage - the tenant is! You're still clearing 1100/month. Even after operational expenses you are cash flowing. You will actually be BETTER OFF than if you did not have the income property and lost your job because guess what - then you have 1100/month coming in vs zero.
I don't even care about appreciation I care about cash flow. Oh God, what happens if I buy a house for 300k and it drops to 200k? What am I going to do? How about not even give a damn because the rents don't drop in sync with the sales prices! In fact rents continued to rise strongly through this whole recession! If you are buying and holding then price fluctuations after you buy are largely irrelevant.
Most people don't have hundreds of thousands of dollars lying around to just scoop up a few properties without financing. And even if you do, you're leaving a big chunk of profit on the table. I'll make a simple example based on a property I am considering buying.
List price 100k, 2 family, rents for 1800, expenses 1200/month including ~400 for a 30 yr fixed mortgage in the low 4s. That's 600 profit a month.
Now, to finance, you'd need 25% down. That's 25k. Plus 4k closing costs. (I don't have to escrow and can count IRA funds for the 'reserve' they want to see. If your bank doesn't give you those options, get a better bank.)
So, you'll make 600 x 12 = 7200 profit yearly. That's a 25% return on your money. And that's before we even look at the mortgage interest deduction and depreciation! Please show me a better investment!
But if you bought it with cash, it becomes 1000 profit a month (since you're no longer paying the 400 mortgage payment) so it becomes 12000 profit yearly. That's only a 12% return on your 104k of cash. LESS THAN HALF COMPARED TO USING FINANCING, FOLKS. If you want to make less than half as much profit, be my guest I suppose... And you don't get the mortgage interest deduction...
If you had 100k cash, you could buy 3 of these properties with loans (29k for DP + CC each) and still have 13k left over to stick in your rainy day / sudden repairs fund. Then you would be making 600x3 = 1800 a month profit, which is 21,600/month, from 87k cash invested, which is again 25% return annually, before we even look at the mortgage interest and depreciation factors.
So do you want to make 12% or 25% for doing the exact same amount of work...
I'm not a financial advisor, use your own best judgment.
It's all about the math isn't it? You can be under water on the mortgage and still cash flow positive, your just not very liquid. At the same time if property values fell because your local economy totally crashed that will mean that rents are likely to fall too. If you paid all cash you can probably still ride it out absorbing vacancy and lower rents. If you are highly leveraged then I hope you haven't personally guaranteed the loan because your corporation is likely to go bankrupt.
One of the best things about living in the US is that it is so easy to fail at business, get back up, dust your self off, and try again -- with all of that new knowledge.
I'm planning to borrow millions of dollars within the next year or two and cash flow 500k/year when the dust settles. The trick will be to only do deals where the math works and to have several exit strategies ready for each deal.
Mark that's what I was thinking... I'm looking at places that go for 100k and rent for 1800+...
To me this whole 'debt' concept of a mortgage on rental property is utter nonsense. If you are paying 500 for a mortgage, 400 for taxes insurance water etc, and renting it for 2000, you are not in some risky position to suddenly get f-ed. Lost your job? Uhhh who cares, you aren't paying the mortgage - the tenant is! You're still clearing 1100/month. Even after operational expenses you are cash flowing. You will actually be BETTER OFF than if you did not have the income property and lost your job because guess what - then you have 1100/month coming in vs zero.
I believe I made a lot of money from people like you, and I'd like to thank you.
The numbers you have work until the tenant moves out and you are paying the mortgage yourself before you get the next tenant. And then the unexpected happens and another house goes empty. No big deal, you can pay the two mortgages no problem.
But then all of a sudden another property is giving you problems. All of a sudden, all your spare cash is going to the mortgage company. You are no longer cash rich, you are simply your mortgage company's *****.
This is what happens when the economy turns sour.
And here's where you take a kick to the balls; one of your tenants trashes a house. Your tight budgets are already strangling you, and all of a sudden you have this $10k bill to turn a house round. And then someone breaks in and steals all the copper just for kicks and giggles. And guts the central air unit.
Very quickly, your leveraged empire starts to fall apart.
And here's where I come in; I buy your houses for a massive discount. I get all the cashflow you had, and I don't have to worry about a mortgage company ever being on my back ;)
Cash is King.
Such an interesting discussion. By the way, about mortgages. I have 30 years fixed for a rental duplex with current low rent. Should I try to pay it off earlier and save some money on interest (which is pretty low right now) or I would better reinvest money into another rentals (which looks more reasonable but means increasing leverage) I am comfortable at 70% leverage as my target in Johnson county, KS, which is pretty stable appreciating area.
In my opinion, pay them off quickly. Any fool can load themselves up with debt. What shows financial strength is to show that you actually own things, as opposed to convincing someone to lend you money.
To me this whole 'debt' concept of a mortgage on rental property is utter nonsense. If you are paying 500 for a mortgage, 400 for taxes insurance water etc, and renting it for 2000, you are not in some risky position to suddenly get f-ed. Lost your job? Uhhh who cares, you aren't paying the mortgage - the tenant is! You're still clearing 1100/month. Even after operational expenses you are cash flowing. You will actually be BETTER OFF than if you did not have the income property and lost your job because guess what - then you have 1100/month coming in vs zero.
I believe I made a lot of money from people like you, and I'd like to thank you.
The numbers you have work until the tenant moves out and you are paying the mortgage yourself before you get the next tenant. And then the unexpected happens and another house goes empty. No big deal, you can pay the two mortgages no problem.
But then all of a sudden another property is giving you problems. All of a sudden, all your spare cash is going to the mortgage company. You are no longer cash rich, you are simply your mortgage company's *****.
This is what happens when the economy turns sour.
And here's where you take a kick to the balls; one of your tenants trashes a house. Your tight budgets are already strangling you, and all of a sudden you have this $10k bill to turn a house round. And then someone breaks in and steals all the copper just for kicks and giggles. And guts the central air unit.
Very quickly, your leveraged empire starts to fall apart.
And here's where I come in; I buy your houses for a massive discount. I get all the cashflow you had, and I don't have to worry about a mortgage company ever being on my back ;)
Cash is King.
So the only way anyone should invest is with cash? I always find it interesting how people love to think their way is the only way to do it and anyone else who thinks different is wrong or will eventually fall into disaster.
How do you know how tight someone's budget is?
The richest people in the world did not get there by using all cash. The biggest companies in the world did not get there by avoiding all debt. If it works for you great, but different strokes for different fokes.
Debt is not a tool.
I would rather own a property debt free and have it cash flow to buy my next property.
The problem I see with most people on this site is they have no patience and can't feel the RISK involved in carrying so much debt.
James DeRoast has it right. Slow and steady wins the race.
PS companies with ZERO DEBT: American Express, Apple, Citrix Systems, Amazon, Bed, Bath & Beyond, TRowe Price, Red Hat, AutoDesk, and MasterCard.
Pretty interesting that TWO major companies thats entire philosophy is marketing the use of debt as a tool are debt free (AMEX & Mastercard)...
Thank you, James. So, if I will be paying off my mortgages quicker, I will have lower cash flow in middle term, but higher in long term perspective. And if I will have higher leverage I will have higher cash flow in short term perspective but higher risk and lower equity in long term perspective.
Look at the numbers. I the debt making you more than the debt costs? Do you have the reserves to cover a few hicups? It is also important to think about what equity does for you. It is important to have equity in case you run into problems. But 90 % paid off properties do nothing unless you sell the home or refi. You don't see any gains until the property is 100% paid off.
If you don't want to buy any more properties then paying them off may be good. If you want to buy more and get more cash flow than maybe paying them off is not a good thing.
Getting a 30 year fixed mortgage on a multi is not exactly an easy thing to do for most people. If you have a low rate locked in, why not keep it?
Debt is not a tool.
I would rather own a property debt free and have it cash flow to buy my next property.
The problem I see with most people on this site is they have no patience and can't feel the RISK involved in carrying so much debt.
James DeRoast has it right. Slow and steady wins the race.
PS companies with ZERO DEBT: American Express, Apple, Citrix Systems, Amazon, Bed, Bath & Beyond, TRowe Price, Red Hat, AutoDesk, and MasterCard.
Pretty interesting that TWO major companies thats entire philosophy is marketing the use of debt as a tool are debt free (AMEX & Mastercard)...
If you think about it, any public company is using debt in a form. They sold stock in their company, sold part of their company to raise funds for future expansion. So when using those examples it is like paying cash for a house and then selling parts of it off to raise money for more properties. Pretty similar to debt
Debt is an awesome tool and I know many investors who have retired in their 30's thanks to using debt on real estate.
For the record I vote the Dave Ramsey philosophy.
The borrower is slave to the lender!
Mark,
Issuing Stock is not a form of debt in the company. Its an investment in future growth in the company based on multiple factors such as profits, new stores opened, ect.
I agree you can be a 30 year old retiring a millionaire but for every 30 year old braggin on the mountain top nobody can count the number of bankruptcies from investors with no clue or no plan.
Jason
For the record I vote the Dave Ramsey philosophy.
The borrower is slave to the lender!
How many houses do you own free and clear?
I'm a newbie to the site and to real estate in general.
I just bought my first rental duplex last year and own it free and clear.
My plan is to use savings and the rental income to snowball my rental investments gradually.
Its the reverse philosophy from many I've read.
For example:
Say I earn 20k per year on rental property I own.
I save 3 to 5 years and buy a rental property with cash for 100 k and then earn another 20k on that property.
Then I save for 2 or 3 years for another 100 k property and buy another property and another.
Eventually the number of years I save goes down and my cash flow and equity go UP.
I will have 100 % equity in my properties, minimal risk and positive cash flow moving forward.
These are simple numbers but just want to give an example of my plan.
Like I said, I'm a newbie. Tell me what you think of my plan. I just signed up and this is my first post I've ever responded to.
Jason
Let's flip your numbers. Instead of saving $100 k and buying one property that brings you $20 k a year, you use 75% leverage and buy 4 properties, $80 k before debt service, for simplicity let's say $40 k after debt service.
In 2 years you pay off one of them, you have $50 k after debt service.
Third year you pay off a second one, you now have $60 k after debt service.
Fourth year you pay off one more, you have $70k, Fifth year, you pay off the last.
What would you choose - buy a property free and clear, and in 5 years buy a second one free and clear and snowball from there, or buy 4 leveraged, in 5 years have all FOUR free and clear, and snowball from there?
Debt is a tool. Use it correctly, and it will help you achieve results much faster. I no longer use debt to buy properties, and that is not because I suddenly got afraid of it - it is simply because banks no longer lend to me at good rates due to the number of mortgages I already have. However I am at a point where the snowball is in full force, and I can keep adding properties to my portfolio while my total outstanding debt decreases, courtesy of my tenants.
I'm a newbie to the site and to real estate in general.
I just bought my first rental duplex last year and own it free and clear.
My plan is to use savings and the rental income to snowball my rental investments gradually.
Its the reverse philosophy from many I've read.
For example:
Say I earn 20k per year on rental property I own.
I save 3 to 5 years and buy a rental property with cash for 100 k and then earn another 20k on that property.
Then I save for 2 or 3 years for another 100 k property and buy another property and another.
Eventually the number of years I save goes down and my cash flow and equity go UP.
I will have 100 % equity in my properties, minimal risk and positive cash flow moving forward.
These are simple numbers but just want to give an example of my plan.
Like I said, I'm a newbie. Tell me what you think of my plan. I just signed up and this is my first post I've ever responded to.
Jason
I'm a newbie to the site and to real estate in general.
I just bought my first rental duplex last year and own it free and clear.
My plan is to use savings and the rental income to snowball my rental investments gradually.
Its the reverse philosophy from many I've read.
For example:
Say I earn 20k per year on rental property I own.
I save 3 to 5 years and buy a rental property with cash for 100 k and then earn another 20k on that property.
Then I save for 2 or 3 years for another 100 k property and buy another property and another.
Eventually the number of years I save goes down and my cash flow and equity go UP.
I will have 100 % equity in my properties, minimal risk and positive cash flow moving forward.
These are simple numbers but just want to give an example of my plan.
Like I said, I'm a newbie. Tell me what you think of my plan. I just signed up and this is my first post I've ever responded to.
Sure you can go that route. Takes three to five years to buy two properties. How long did it take to save the cash for the first one ? Returns on the cash invested will also be less. I have bought 13 since the end of 2010 with close to $7,000 a month in income coming in. Using all cash I may have three that bring in $3,000 a month.
I think this is exactly the opposite of my plan and long term will have similar results with more risk. Your years 2 thru 4 have more risk than mine but more properties. If any issues DeRoest mentioned come true than my plan works better if you come out unscathed than your plan works better.
I think the Ramsey vs Kiyosaki debate comes down to risk vs risk aversion and how comfortable the investor is with the associated risk.
@Jane A. said. 30 year fixed low rate on a rental? You must be crazy to pay that off... Your tenants are paying it down for you, focus on buying your next one. As illogical as it sounds, the bank that was happy to offer this loan to you while you had zero experience will flatly reject your application once you have 7-8 cash flowing financed properties and a proven track record as a landlord. Actually, not reject you - they will just forward you to their commercial lending division where you will be offered a loan with a 5 year balloon and a rate probably double what you have now.
I think the difference would be between properties bought and properties owned. 100% of foreclosures occur on properties with a mortgage. Like I said my snowball rolls very slow to start but will speed up as it grows.
I think this is exactly the opposite of my plan and long term will have similar results with more risk. Your years 2 thru 4 have more risk than mine but more properties. If any issues DeRoest mentioned come true than my plan works better if you come out unscathed than your plan works better.
I think the Ramsey vs Kiyosaki debate comes down to risk vs risk aversion and how comfortable the investor is with the associated risk.
Not really true. There are many factors to consider. The reserves, the equity build up from buying below market, tax advantsges, etc. I have 13 props in 4 and a half years versus three with all cash. Paying 80k to 135k with financing. I gain as least 20k a property buying below market. Plus a save a couple thousand a year on depreciation from taxes on each property and a couple thousand on equity pay down for each property. I have plenty of reserves andcsn weather storms.
I would live to know how long it took to save the cash for your first one.
I don't understand the logic on having tenants pay it down:
If I pay for a 100k house with cash the cost of the house is 100k (for example)
If I get a 30 yr fixed rate 4% on 100k house and have the tenants pay it down I would pay 172k for that same house.
Am I missing something cuz I would rather keep the 72k.
@Jason Giomboni I will try to explain it. Let's assume, for simplicity, that you get 100K house with 100% financing (not realistic, I know). You rent it for $1200 and your expenses including mortgage, maintenance, vacancy etc. are $1200.
You do not get cash flow, but you pay nothing out of pocket. In 30 years, you get your property free and clear. Yes, your tenants paid $172 k for that $100k house. But it is your tenants who paid it, and you the one who owns it free and clear.
To each their own but I would rather those 30 years of rental payments financing my investments and not the banks.
@Jason Giomboni The bank makes 4% on its investment in our hypothetical scenario. The bank invests $100 k and in 30 years makes $72 k on it.
You invest $0, and in 30 years make $100k.
Do you seriously prefer to be the bank in this case? There are many lenders here on BP, but they are NOT lending at 4%. Nowhere near...
having seen Dave ramsey's home and office buildings in Franklin Tn. The guy is a hypocrite. Does anyone know his back story ? You don't become a Deca-millionaire without borrowing money. So either
He was already rich or he used Leverage ?
As far as Robert Kiyosaki regardless if he didn't have a childhood at all, he outlines the plan every wealthy family in american uses to acquire and retain wealth.
Build a business, invest the proceeds, rinse and repeat.
So the question is really at what level of wealth are you trying to achieve?