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Dave Ramsey recommends buying everything with cash!
Hello,
What have you done what do you prefer? What are the pros and cons of both?
Have you guys bought real estate (multifamily or single family) in cash and rented them until you saved up for your next investment to pay in full?
Versus
Getting a mortgage and paying the interest but being able to buy more real estate instead of waiting and saving for a longer period of time.
I know this is probably a tough question right now due to the virus but I’m just curious about people’s insight on buying in full versus getting a mortgage.
For my first investment property, I purchased with cash. 3 years later, I got a mortgage on it and put a down payment on 3 properties. I believe in both schools of thought for different things - Dave R. for everything but real estate and Robert K. for everything real estate. To that point, I don't have credit card debt, I live well below my means, and I make my tenants pay for my mortgages.
@Andy Whitcomb my wife and I did the same thing before we got married. Great foundational principles in Financial Peace University FPU. Has helped us talk about money ever since.
@Matthew Rembish
I’m looking to do something similar but with 50k-115k properties. Especially duplexes around 80k or fourplexes for around 115k (looking in Dayton Ohio near me in Columbus) Well, have been thinking of putting 50% down actually, having a small mortgage so I have solid cash flow and much less risk than having a larger mortgage (can’t stand the idea of having 100-200 per month cash flow properties... too little return). Thoughts?
There is good debt and there is bad debt. There are a lot of good things about Dave Ramsey, but this is one of those that I don't agree with. Where I live in NY houses go for 600k plus...unless you are a celebrity or born with a silver spoon or are wiling to work for 60 yers before becoming a home owner... you'll never own a house.
Getting creative and using Other Peoples Money is not bad, its sophisticated and 100% valuable. Besides, owning it outright makes you quite attractive to anyone looking to cash in via lawsuit. Why make yourself attractive to the sharks?
I’m totally with you on that. And I’ve thought about doing the 50% down method because at least you still get to have the tenant pay down some your debt service. I think if you’re putting 50% down and buying multi unit properties, you’re mitigating just as much of your risk as I am on my 100% down single family properties. I think that’s a solid strategy.
Originally posted by @Justin Gottuso:
@Matthew Rembish
I’m looking to do something similar but with 50k-115k properties. Especially duplexes around 80k or fourplexes for around 115k (looking in Dayton Ohio near me in Columbus) Well, have been thinking of putting 50% down actually, having a small mortgage so I have solid cash flow and much less risk than having a larger mortgage (can’t stand the idea of having 100-200 per month cash flow properties... too little return). Thoughts?
@Kai Sato-Franks I leveraged my first property and have a mortgage for 55,000$ ! I'm paying it down as quick as I can than taking a HELOC for buy my second property in all cash. I feel more comparable not leveraging allot of money, however in an excessive saver and make good money at my day job where I work very hard so in two years I'll be able to buy a second property
I always love reading everyone’s viewpoints.....but is there a correct one? As an avid reader of all things financial, I’ve always found the conflict between Ramsey and RK hilarious. Ones method is to get to wealth via a slow simmer, living frugally, and coming out on the other end smelling like a rose when you’re retired (and maybe too old to enjoy it). The other boast pushing hard, leveraging the investment, and living for the now. Ramsey is for the person who wants a simple life free of the entrapments most people are tangled in. RK is for the person willing to risk it all and live more on the edge. In a bull market, RK seems like a superhero and Ramsey as playing it too safe. In a bear, or pandemic, housing crash, etc, Ramsey’s method leaves people sleeping easy while many RK followers are running around losing their minds. Both have valid points, but to get a better idea of the “real” way to do it, i like The Millionaire Next Door”.... There are no flashy moguls in that book. No cigarette boats or debt up to your eyeballs. No, it’s just how to sensibly become wealthy and not screw it up..... which to me is the best compromise of all. I realize everyone here wants 500 doors rollin cash into our accounts so we can travel the world. But fact is, if you were retired now with one paid for 16 unit building/complex, you’d be doing pretty damn well. Say at 1k per unit.......192k per year income during retirement....that’s pretty solid no matter where you are. So I’m trying to be realistic in setting my goals and working toward them, all while leveraging only what needs to be, and living within my means along the way.
@Marc Rose just to be clear Dave Ramsey made his money by selling books, seminars, and YouTube. He didn't make his money by saving money to be rich. So watch what you put out there, it is misleading.
Originally posted by @Trevor Aydelott:
@Marc Rose just to be clear Dave Ramsey made his money by selling books, seminars, and YouTube. He didn't make his money by saving money to be rich. So watch what you put out there, it is misleading.
Appreciate the warning, but I’m confident in what I put out there. His wealth comes from many sources, including real estate and investing.
@Matthew Rembish wondering where you buy your properties for $100k?
I like Dave R. Which is surprising since he is a gun toting evangelical, in his own words "redneck hillbilly" :-). But his financial advice is spot on for most Americans. I don't do the steps, Ive borrowed money for multiple mortgages and use a CC for points. But I have always lived way below my means. I don't like Kiyosaki. He may have a few good points in one book but overall he's a conman guru with the expensive seminars where he makes his money. Dave makes his money giving solid advice that actually works for most people. If I had to choose just one to follow it would be Dave R.
I read Kyosaki's books first and had trouble applying his theories to my situation. I started listening to Dave Ramsey on my 1 hour commute to and from work. Dave was entertaining and pointed out that the Bible has a lot to say about money and business. DR helped me break out of the poverty mindset instilled by my "Christian" upbringing. I have gone to several of DR's Entreleadership events which are a significant nod towards teaching how to gain and maintain wealth. I owe much of my success and net worth to Dave Ramsey. I purchased my first few investment properties with cash. Recently i learned about the infinite banking system and bought whole life policies for my wife and myself. I'm also borrowing to buy my next investment property. I sometimes have a twinge of guilt for straying from DR's philosophies. I have to admit that buying property with cash is more fun, less time and documentation intense, and saves on fees. However, it is also fun to buy property and still have some cash. And I really like the idea of paying down leveraged investments with inflated cash.
Dave Ramsey doesn't talk much about how he earned money after he went bankrupt. But I listened to one podcast where he admitted to earning his living with RE commissions and wholesaling. Apparently his books and courses barely broke even for the first few years. Now he is a world-class entertainer. Most of Kyosaki's work also seems to be "edutainment". But most of us are stymied by our beliefs so it is good to get us to rethink our views of money.
@Kai Sato-Franks, Dave Ramsey explains that when he was young and reckless, he took much more debt than he could repay and ended up bankrupt and in a traumatic situation.
Given current US real estate rental profitability and interest rate, it makes sense to take as much debt as possible while keeping a margin of safety. An old common sense rule for large investors who have no other income that their investment is to keep their debt/equity below 3. A conservative rule for investors who have other income is to keep their debt and housing payments within 1/3 of their stable income.
These are old rules and the numbers should actually depend on interest rate levels and be much higher when rates are low, much lower when rates are high. Dave Ramsey all-cash rule seems to be an over-adaptation to the time mortgage rates were 12%.
Those 10 conforming 30Y fixed-rates mortgages are a gift of the federal government to every American. I would take debt provided that there is no balloon, no rate reset and repayment is within 30% of my income.
If you are talking about flips, then you need to make allowance for unfavorable changes in market direction and buyer's appetite.
#3 Managing Your Property Contributor
Originally posted by @Emily Lauren boulden:
@Kai Sato-Franks I leveraged my first property and have a mortgage for 55,000$ ! I'm paying it down as quick as I can than taking a HELOC for buy my second property in all cash. I feel more comparable not leveraging allot of money, however in an excessive saver and make good money at my day job where I work very hard so in two years I'll be able to buy a second property
If you are taking a HELOC to pay for the second property in cash, you are still borrowing money. I'm not saying there is a problem with that, just pointing out that you are still borrowing the money.
Dave Ramsey is not entirely wrong. We live in uncertain times so caution is warranted. I certainly wouldn't be paying cash for anything. On the other hand, I would not be leveraging to the max either. There is a happy medium. Make sure you have sufficient reserves to weather a storm if push comes to shove.
@Kai Sato-Franks
I haven’t read his article to fully understand the context. I will put my thoughts for a cent.
I personally have 7 Investment properties paid in cash. The great advantage was the purchase price x timing of the purchase. I always buy them with deep discounts. 10-15% if include the appliances and systems added.
I had savings in bank and was able to do it without leveraging. In fact it did NOT make sense to take credit of 4-4.5% while my money was at the bank with return of 1-1.5%.
I can understand though leveraging. Not many will be able to buy the property paying in cash.
Recently i decided to take a mortgage to start leveraging. I put my properties in LLC and the rates i have been seeing is ridiculous. A 30 yrs in a LLC was offered at 4,25%. My credit is around 800, but in a LLC it makes almost no effect. Not sure if you guys see a better level, but considering this, it makes no sense to invest considering no appreciation. And prospects for real estate markets do not see much room for appreciation in the nee future.
To make it worse, considere the real interest rates, the one impacted for the lower/no discount on the negotiation...
Now take into perspective the scenario where you could be facing increasing in number of tenants not paying... but mortgages are there, charging...
Theres a good feeling in having no /reduced amount of debt. And the power of cash speaks loud. If you can, try to start with the
Least leverage possible and start leveraging after some time. It will give strong start and strong base to face adverse scenarios, while leveraging can have a nasty effect when you face a defaulting situation
@Kai Sato-Franks dave ramsey has good advice for the average person working a desk job.
Although, you arent going to become independantly wealthy, quit your job and have your own business following his advice.
I'd like to remind everyone, at the end of the ramsey sales funnel, is a guy whos trying to sell you front loaded mutual funds, and he had to pay for the "ramsey seal of whatever", and got you fed to him as a lead. Its a really antiquated system because ETF's are far more efficent, and no one gets a sales commision on ETF's
@Kai Sato-Franks Hi!
Dave Ramsey states that buying your first home you should go with a 20% down 15-year fixed mortgage. (Baby Step 3B) He understands that owning your home is the quickest path to wealth.
Of course, if you have enough capital lying around to purchase your first home then go for it. But if all you have is 10%, 20%, 30%, 40%, etc. then take the remainder on a 15-year fixed mortgage.
He also says that if you plan to buy real estate after your first home then you should pay in cash.
Here are my thoughts:
I need approximately $80,000 for a down payment. 20% of 400,000. this would be a multifamily home in New Hampshire (I plan to house hack) Saving for this would take me approximately 3 years and 3 years of paying rent of $1500-$2000 a month. Or I could use a low down payment option FHA or in my case a VA loan to get out of renting and buy a house much sooner than 3 years from now.
I am a follower of the Ramsey plan, it helped me get back on my feet again. But I can tell you that I am not waiting for 3 years to purchase my first house hack. If you think about it, I would pay practically a down payment to my landlord in 3 years. (40 months x $1500 - $2000 = $60,000 - $80,000 of rent) Instead, I will put every penny leftover into my mortgage and pay below the 80% threshold, likely in 2 years, to get PMI removed. (which is the major reason that Dave Ramsey wants you to pay at least 20% down)
Just my thoughts, tell me if you think I'm crazy.
Cheers,
Matt
All I can say is that during these Covid times, I have been SO glad that I paid all cash, AND that my tenant gets a PERS pension! Whew!!;-)
NOTE: I purchased my property for $215K.
@Alexandre Marques dos Santos, thank you for posting. One theme that I noticed while reading this thread is that the words "never", "restricted", "limited",and "forever" come up often in arguments for leveraged real estate. The idea being that only people who inherit cash can pay cash for real estate. Dave Ramsey would probably argue that if you haven't been able to save cash, you likely have wrong thinking about money that will be amplified if you borrow money to buy a real estate investment. Archimedes said "give me a long enough lever and I can move the world". Leverage is powerful but it works both ways -- I still remember getting cracked on the jaw by the handle of a bumper jack....
I think I listened to about 150 biggerpockets podcasts before I heard one guy say that all his real estate investments were bought with cash and 100% owned. If I remember correctly, he wasn't opposed to debt, just found it faster and less hassle to pay with cash -- and he didn't have to worry about having reserves. Also he self-managed his properties and he argued that, although he could get a theoretically higher rate of return with leverage (and buy $4M worth of property with his $1M), it was much less work to manage 10 properties than to manage 40. He said it was remarkable how quickly his fund built up combining rental income with his job earnings (so it took a while to buy the first 2, but each one came more quickly)
So I think Dave Ramsey's philosophy might have more merit than this discussion represents (and I'm straying so don't think I'm defending him as a rabid loyalist.) Keep in mind that the vast majority of biggerpockets members seem to embrace debt as a way to build wealth with real estate. (I have been heavily influenced by biggerpockets to relinquish my hatred of debt -- @Brandon Turner, I'm blaming you if I go bankrupt) BiggerPockets is like one form of religion and Dave Ramsey is another form. BiggerPockets would be more ecumenical (inclusive of diverse viewpoints or "seeker-friendly") Dave Ramsey is more "fundamentalist" (adhering to a narrow interpretation of the text and strongly opposed to any deviant views) BiggerPockets and Dave Ramsey, just like different churches, attract different types of people. And each group has rich and poor, old and young, effective and marginal, faithful and nominal, succeeding or failing. Dave Ramsey's method has built wealth for his family and many thousands of adherents. If you are reading this thread to find the truth, consider the sources. Even Dave Ramsey's advice may be skewed by his sources of money. Know that it is possible to build wealth without debt. It may not be the fastest way, but it is possible. I've met people who did it. And they are usually quiet -- not shouting or posting on social media about their success.
@Joel Florian you've hit this 100% on the head.
Extremists on both ends are of the spectrum are not to be idolized.
I kinda just think using Dave Ramsey’s radio/podcast/YouTube stuff for property investing advice is square peg in a round hole as it just not the intended audience- I’m sure his personal practices are quite different.
@Matt Smith I don't think anyone is crazy to buy a home or a multifamily. I also don't think it is so bad to rent. Let me explain: I quit missionary work and got a job when I was 35. I was married with 3 kids under the age of 7. I had no verifiable work history, some second-hand furniture, thrift store clothes, a salvaged minivan, and -$2000. I got a job at Sears and bought a fixer-upper with a no-doc loan -- 0% down, 7% interest only 5/1ARM 30y first and 13% fixed second with a 15 year balloon. My wife homeschooled the kids. I worked full time, fixed the house, started a greenhouse business, and sold stuff on eBay. It was stressfull. Money was tight. My wife resented living in an unfinished construction zone. The neighborhood was rough with frequent drug busts and break-ins to cars. I got a better job, but it was an hour away from the house. We desperately wanted to move, but the house wasn't finished enough to sell or rent. And by then, financing was more difficult so I couldn't qualify for a second home without selling the first. So we were trapped in a house we didn't like, in a declining neighborhood that required an hour commute each way to my job. We lived in that house for almost 10 years. I refinanced twice. Between taxes, insurance, repairs, refinance fees, realtor fees, we marginally did better than renting.
When a missionary friend decided to join the real world and come work for me, he desperately wanted to buy a house right away. I told him my story and recommended that he rent for a year -- and spend that year getting to know the neighborhood and essentially house shopping. He ended up taking my advice and bought a house a year later from a mutual friend who was leaving the state (below market value and without a realtor, if I remember correctly) He got a great house at a great price in a good location -- and saved way more than the $2 or $3k he might have gained in equity had he bought earlier.
And yet another missionary friend took my advice and is still renting 3-years later because it was more convenient for her a new business venture.
My next home was better. But then I sold everything to take a job in Hawaii. I was hoping to buy a fixer-upper in Hawaii and live in it till the job was over.
Selling the last house cost me about $60,000 in repairs,concessions, realtor costs and closing fees.
I found prices very high in Hawaii -- with the only houses in my price range about an hour away from work -- and in less desirable neighborhoods. I also wasn't sure how long the job would last. I did the math and discovered that most rents in that particular area of HI were roughly equal to the interest, taxes, and insurance portion of a mortgage payment. I would have to assume 5% appreciation and hold the home for at least 5 years to cancel the closing costs. I couldn't find a home I liked, in a location I liked for less than $650k. I found a month-to-month rental and we lived in that while looking for better options. Then the Covid lockdown. 6 months in, the general contractor got terminated and my job ended. I was very glad I took the advice I got from BiggerPockets and rented in HI while looking for out of state investements.
Now I'm back in Alaska living in another month-to-month rental looking for another home -- but not wanting to spend too much (probably looking for a live-in-flip and converting it to a rental -- would that be a live-in-BRRR?) because my wife decided she likes warm weather....
I'm still waiting for my latest out of state investment to close and frustrated because I'm trying to get a loan -- the seller is dragging out the transaction for 2 1/2 months so I have to keep sending the underwriter statements and then documentation for every large deposit or withdrawal.
To summarize, renting can be a decent, low risk option -- especially if you can find a month-to-month very close to your work. And renting may be cheaper if you factor in taxes, insurance, repairs & maintenance, and closing costs on both ends.
Buying can be much more profitable, but it can also be very restrictive and emotionally painful. (believe me, it was much more painful move out and sell our last homes in Alaska than to move out of rentals)
A couple of BiggerPockets podcast guests have stated that they don't own a primary residence -- they invest where the returns are good and live where they want -- for as long as they want -- and use the rental income to pay rent.
While I was still a Dave Ramsey, no-debt adherent, I bid (and won) some cheap tax deeds. That enabled me to pay cash for real estate without much money. Since then I have also purchased real estate notes (starting with $8,000) I aim for a 1% payment which works out to about 10% return on an 18 year note. Just a couple more options if you are on the fence about getting a mortgage. And that reminds me of one more thing. If you are married, it is absolutely essential for both spouses to be on-board about an investment or a large debt. I have discussed every major financial decision with my wife (and now my teenage kids because they need to learn how to manage whatever legacy we leave them).
Quick thoughts as most has been covered:
This is just levered vs unlevered.
From a theoretical standpoint, your deals should be able to stand on their own w/out leverage (don't underwrite deals that ONLY WORK w/ leverage).
There is no free lunch. The less debt the less potential returns (assuming you have positive leverage...which you should) but there should be less risk.
A lot of these questions can be (and have been) solved through financial theory/academia/etc. You could create a DCF (w/ levered and unlevered returns) and compare the relative IRR's/returns to see if the additional return is worth the risk; OR assign an appropriate levered & unlevered discount rate to the two cashflows and compare the two.
But to echo a lot of people here...realistically most people can't buy homes cash. AND to buttress that argument...large institutional players and HNW individuals w/ access to capital above what my savings acct will every show don't do unlevered deals.
Good posts and thoughts above. Thanks!
Most of them come right off of the MLS, you just have to be ready to act fast, although I’ve been working with more wholesalers lately.
Originally posted by @Arta Montero:
@Matthew Rembish wondering where you buy your properties for $100k?