Debt Free Home Buying...Does the Dave Ramsey Plan actually work?

[Jamel Hamka]

This is not going to be a popular post because I am going to talk about debt free investing. That means never using debt or private lending for real estate. First, let me state that I don’t believe Dave Ramsey is the only way and it’s morally wrong to use debt all the time. But I want this to show in a very practical way that not using debt and actually using his plan works and works especially in the long haul.

Secondly, this plan only works if you subscribe to the entire baby steps. If you don’t know what that is than you need to Google it. That means living on a zero based budget (no credit cards...debit cards and cash), paying off debts, not over buying personal residence (15 year fixed rate mortgage that payment is no more than 25% take home pay), having an emergency fund and aggressively getting out of debt including home. It also means not buying a rental property until you have paid off home and all debt. This plan does not work well if you don’t commit to the entire plan.

With all that said please consider this option by looking at our story. We completed “Baby Step 7” around 7 years ago. That means we paid off our mortgage after several years of going up the steps. We then took all the money we were paying in mortgage and debts and began to save for a rental property. We bought our first home around 6 years ago all cash. We paid to renovate it and put a renter in it. All the cash flow from the rent went into buying another property. We took our money saved with the rent and in around a year we bought our second property with cash and renovated and rented it. We did this over and over again. We did work faster than most because our personal business grew and we were able to put more cash in it personally every year but I would rather own 5 rentals paid to for than 50 with debt. Thankfully we didn’t have just one choice. We have been doing this consistently for 6 years and currently have 36 paid for properties generating just at $50,000 in rent per month

[Jamel Hamka]

@Landon Bleau

Great question. There’s a math answer and a behavior answer. If we were simple computers with no emotions than using “leverage” to buy rentals even at the beginning makes sense. But finances is more than just math. It’s behavior and I have found personally that using debt is similar to using an addictive drug. It’s easy to start and hard to quit. I decided to stop playing the banks game and decided to simply pay cash for everything. Once I made that decision and I wanted to get in real estate I cut our budget down. I doubled down on my W2 and worked as much as I could to increase my wealth. With having no debt it didn’t take long to save the $70,000 I needed to buy my first rental. The first one is the most difficult by far. But I decided I would rather own 5 paid for rental properties than 50 with leverage. Oddly enough my first home was a foreclosure that was owned by one of the biggest investors in my town that slowly lost all of his rental properties from over leveraging in 2007-2008. He still owns around 60 homes in my town and lives in the house across from my rental. He is known to be a very successful investor in my town still but the truth is that he is “all hat and no cattle” as they say in TX. He gets equity and as soon as he can he refinances and buys another property. I’ve seen what leverage does. It works for some people. Debt free investing works for almost all people. It’s slow but it works...especially if your younger. The snowball grows incredibly fast and we have projected between our rent income and buying more and more houses to be needing to buy hundreds of homes a year to keep up with cash flow. In 30 years conservative estimates takes us into the 10 figures. It works. It may not get you 10 figures but easily does 7.