Do you agree with him?

Question

Ok, I admit it.  I listen to Dave Ramsey.  Today he had a caller ask about REI.  Here are some of his major issues:

1. Be Patient.  Most beginners get all excited and think they are going to make a killing, but they end up paying too much.  Be patient and wait for a steal to come along.

2. Hold long term.  He only buys with a 15-20 yr expected hold.  Wants to be in a growing area to take advantage of appreciation in value.

3. Invest for Cash Flow,Appreciation,Depreciation. Take advantage and understand all of these components.

4. Pay All Cash.  Do not use debt to buy RE.

5. Don't Pay Over 70% ARV-Repairs.  Make sure you know what is the current value and don't pay more than 70% less the cost of repairs. Hard to find, but be patient.

Do you agree?  #1, #3 and even #4 certainly makes sense, but what about #2 & #4?

Now, I know that there are many who rehab and flip.  So I'm not sure that falls under this definition of RE Investing.  Those of you who hold and rent, what is your time frame?  Is there anyone on BP, or perhaps in America(besides Dave and his employees) who pays all cash?  As you may know, he views debt biblically, and percieves it as a master/slave relationship.  I like this idea as a theory but is there an ultra conservative compromise, say 50% LTV?

Bryan Hancock · Answer

Paying all cash makes sense to get the best prices.  Leveraging after that makes more sense to me.  The beauty of real estate is being able to leverage your returns up to make a supernormal profit.  If you aren't going to do this then you can likely find better risk-adjusted yields elsewhere without all of the hassle.

Curt Davis · Answer

The only one I slightly disagree with is #4.  If everyone had to wait to buy property with cash some would never be able to purchase.  I had the privilege to meet Dave Ramsey about 1 year ago exactly and spend an evening with him at his home in Nashville and I can tell you that he is operating on a totally different level then anyone on this site.  Learning about what the rich invest in made for a fascinating evening along with touring his 21,000 SqFt mansion on top of a overlook.  In his position he can buy everything cash, in most of our situations we can not.

Jeff S. · Answer

Buying with leverage was the only way I could have created any wealth with RE.

Have bought in up and down markets, learned being patient is the way to go. Buying for the sake of buying is a huge mistake. Following the crowd can ruin you. in 1991 RE was unpopular and I was laughed at. That is the time to buy.

Right now I am on the fence because going debt free is an option. I can't help but think that piling up some cheap cash will be a good move but interest rates just keep going down and the world seems pretty unstable.

Michael Seeker · Answer

I think #4 is probably the worst piece of advice for a new investor.  Unless you are already wealthy, you will sit on the sidelines for many many years trying to save up enough cash to buy a property that could likely be leveraged with an investment loan very easily.

I think #5 contradicts #1.  I only agree with #1 if you don't understand your market.  Once you have a good feel for where you are buying, you should be able to pull the trigger on a property that's been on the market for a day or two.  If you practice patience when a steal comes along, it's going to get stolen out from under you.

I do agree with #2, short term investments are very tax-disadvantaged.  However I wouldn't make long term investments for appreciation.  If you do this, you're looking at just staying on pace with inflation.  In looking long term, I want a property that will cash flow, appreciation should just be an added bonus at the end of the day.

It seems like each of his rules could be applied to certain aspects of RE investing, but when you look at them with a blanket approach to all RE investing, they are very vague and don't really offer any true guidance.

Just my thoughts.  Given the vagueness I think one could easily argue for and against each of these points and give a solid case for why each does or doesn't make sense.

Patrick Snyder · Answer

Buying all cash and holding for the long term is great if you are already wealthy, but not realistic, especially for beginners.  Plan, buy wisely, and use GOOD debt to create income and generate net worth.

Freddy C. · Answer

No shame in listening to Dave Ramsey, Tod. To me, Dave's niche is the "financially illiterate/ irresponsible" segment. The people that seek his advice are often in debt up to their eyeballs (consumer debt for ex.), and have no idea how to manage their personal finances. If memory serves, he made a real crummy RE deal once or twice that (contributed) to ruining him. I don't recall the details but he is open about his past (this was many years ago.) Anyway, he wised up and paid his debts down aggressively. Obviously, he is a "cash only" kind of guy now.

That being said, he preaches good advice for the most part. But to answer your question, he is dead wrong on point #4. Leverage, used responsibly, is a great way to grow your business. I disagree wholeheartedly with his "all debt is bad" outlook. "cash only" is his method. He is rigid about this.

John Jackson · Answer

I am all for debt free and paying cash, but I don't agree with everything Dave says, such as...pay off all your debt, and even though you have no credit score because you have no debt you can get a mortgage....really?  I'm in the biz..and...I don't know of a lender that will take alt. trade lines anymore...
I think it's fine to take a loan for an investment property, but you have to have the gameplan and stay within your means. 
As far as 15-20 yr outlook..again..it varies. 
RE is JUST ..JUST like the stock/options market...what fits one doesn't fit another. 
Try telling a daytrader that trades for teenies to hold for the long term...try telling an investor that looks at 30 plus years out to trade for teenies...
2 different people..2 different plans....2 different comfort levels.

Andrew Jones · Answer

As long as you buy right then the cash cash returns are simply better with good financing. Also if you dont have a lot of cash it's the only way.

Bryan Hancock · Answer

It really depends on what you are trying to optimize.  Buying for cash certainly does not optimize how hard the dollars are working.  It does optimize the dollars out though.

Of course you cash flow more with no debt!  You also have better returns on the tennis court without a net.  No debt equals lazy/idle money in deals.  That is fine if that is your goal, but it is certainly not optimal.

Rob Gillespie · Answer

I do not listen to him, but he is right on point with buying without debt!!! I preach the same thing all of the time. I have had leveraged deals and many free and clear ones, I like the free and clear ones better! My buddy that will remain nameless, he is a BP member as well agrees with me. He has 136 properties, and he said the only ones that make him real money are his free and clear. The rest are a pain in the butt!

The 15 year holding, I am not sold on. If I have a chance to sell one of my free and clears at a profit and buy 2 more, I will jump on it!

This is not the only way, It is just what I prefer. Flip contracts to make the money to buy free and clear. Pretty simple formula.

Do you agree with him?

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