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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.
#3 Managing Your Property Contributor
@Kai Sato-Franks Most people do not live in areas where that is remotely possible. How can you buy a $250K house with cash? Even the cheap houses that are $50K which don't exist everywhere.
Best option is to put your 20% down, use a mortgage for the rest and repeat.
Dave Ramsey's audience is more so towards people who made bad mistakes with money. However as Investors (at least with me), I tend to follow Robert Kiyosaki's (The Opposite of Ramsey) philosphy.
@Theresa Harris very true and somewhat unrealistic unless you find a partner that has money. I just wanted to see if people have done it this way how did they do it? Of course they could have a great source of income and just do it but if they aren’t, how did they acquire money? What steps did they take?
@Brian Geiger I don’t disagree with Ramsey on buying in cash but it just seems unrealistic for a lot of people (like me). I agree with Robert as well! It makes sense if the numbers are right but the idea of relying on tenets paying my mortgage until they don’t and a pandemic happens worries me but I guess that’s the risk you take!
#3 Managing Your Property Contributor
Originally posted by @Kai Sato-Franks:
@Theresa Harris very true and somewhat unrealistic unless you find a partner that has money. I just wanted to see if people have done it this way how did they do it? Of course they could have a great source of income and just do it but if they aren’t, how did they acquire money? What steps did they take?
I do think remaining debt free (aside from a mortgage) is the best option. If you can't afford it, save up and then buy it. It also makes for fewer impulse purchases. As for how did people get the money to invest, most just saved. Saving is easier when you have a goal in mind and once you've bought one property, you have extra money coming in to help with the next one.
Originally posted by @Kai Sato-Franks:
@Brian Geiger I don’t disagree with Ramsey on buying in cash but it just seems unrealistic for a lot of people (like me). I agree with Robert as well! It makes sense if the numbers are right but the idea of relying on tenets paying my mortgage until they don’t and a pandemic happens worries me but I guess that’s the risk you take!
I really do like Dave Ramsey and I used his baby steps to get out of debt, build an emergency fund, and learn the basics of budgeting. Keeping that in mind, I do not follow his advice on real estate investing. I believe his advice on real estate investing is absolutely terrible.
1. Save $1000
2. Pay off all of your debts smallest to largest using the debt snowball
3. Save 3-6 months of emergency reserves
4. Invest 15% in retirement accounts
5. Save for your kid's college
6. Pay off your house
NOW, you can begin to invest in real estate.
The previous steps may take you 5-10 years to accomplish. Only after you have done them can you begin to invest in real estate according to Dave Ramsey. All real estate you buy must be in all cash. So if you are buying a $200,000 single family rental, you must save $200,000 up to pay for it. Even aggressively saving $50,000 per year, expect to wait four additional years to make your first purchase.
So it could take you 10-15 years to buy your first rental property with Dave Ramsey's plan. As most investors know, you will be giving up appreciation, debt pay down, and tax benefits by paying all cash. You will also likely receive a much lower return on investment. The higher cash flow you receive will not make up for the other factors.
Leverage is a powerful tool in real estate investing. It has literally made me hundreds of thousands of dollars. Fear of debt will slow your progress and growth as well.
I know Paula Pant has some paid off investment properties. I think she bought some with cash and has paid off a few others, in lieu of investing in additional properties. For me, with the new tax laws limiting the amount of mortgage interest on your primary home that is deductible, we would always select to pay down or off our primary mortgage. Then we keep the investment interest that is fully deductible.
@Anthony Gayden I agree! I looked at other posts and people argue well it depends on what your goal is and age is in real estate and some people like that feeling of having no debt but it’s all about risk!
@Theresa Harris great advice! Thank you!
#1 Real Estate Agent Contributor
- Investor
- San Antonio
Haaa another Dave Ramsey thread. There’s many already, but another doesn’t hurt:)
As others have said, 'it all depends'. ;-)
In my case I do some of each. When I started with rentals I did not have a lot of liquid cash for downpayments, but I *did* have a lot in retirement accounts, as did my partners. So our first one we pooled SDRIRAs and 'paid cash'. As well as the second one. Since it is a bit harder to finance, and there *might* be UDFI Tax, and it is a ROTH so liquidity will be nice when I retire that seemed like a simple chunk to leave UN-leveraged.
We then all scrapped up cash for down payments and did conventional purchases for a handful of down-payments. These throw off some cash flow, but our real play is long term returns.
We then went back to retirement accounts, but this time with SOLO401Ks so we *could* leverage and *not* have to worry about UDFI Tax at all.
So, there is not right or wrong way. We have leverage ratios of 0% up to about 75%, and I like having that mix. One thing we do in all LLCs, and in particular the 75% leveraged ones is to keep at LEAST 6 months PITI on hand in case things go south somehow. That is enough to give us peace of mind.
And talking about "peace", that is where DR comes in.... His course is called Financial PEACE University. So if PEACE is more important to *you* than maximizing returns (which is what leverage usually does) then DR is the way for you :-)
@Anthony Gayden Said it best! Leverage is an extremely powerful tool! There's no other way to achieve an infinite ROI without using leverage. (Specifically speaking of using the BRRRR strategy to pull out your entire investment.) Leverage allows you to compound your money at a rate much higher than any savings account. In some cases, I've been able to use leverage to give myself a stronger equity position which directly rebukes the notion that leverage is too risky.
HOWEVER, to quote Spiderman, "With great power comes great responsibility" and that holds true for leverage. The proper amount of leverage can lead to a ton of success. Too much leverage can bring it all toppling down.
It really comes down to who you are and what your goals are. Do you want to NOT be poor? Or do you want to be wealthy?
In general, Dave Ramsey is very good at helping people who are deep in debt and struggling to manage their money. It's a philosophy for not being broke, and for that reason I think it's a good place to start to build a strong personal financial position before investing. If your personal finances are a mess, then you're going to have trouble investing in real estate, and you probably should NOT use leverage to buy real estate. Remember Warren Buffett's rule about investing: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
With that said, as others have mentioned in this thread, his philosophy of "all debt is bad" is generally counterproductive in real estate investing. Real estate investors know that leverage via long term debt is one of the most powerful tools when combined with an appreciating, cash-flowing property. Of course, this is the Kiyosaki philosophy; and where Dave Ramsey is great for keeping you from being poor, Kiyosaki's method of using debt to buy assets will make you very wealthy.
As a side note about Dave Ramsey's FPU... my wife is an investment banker and a big Dave Ramsey fan. When I met her she had already gone through FPU two or three times. She persuaded me to go take the class with her before we even got engaged. She did this partially because she thought I could benefit from the financial education (which I did, even though I disagreed with some of it), but mainly because she knew that it would force us to talk about money in ways that most people never do. Money --and the lack of communication around money-- is the largest cause of divorce. Taking that class set us on a trajectory where we fully understood one-anothers views about money, and helped to align them. I highly recommend this for newlyweds or if you are engaged. And when you're done, read (or re-read) Kiyosaki's books and make your own decision on how to use, or not use debt.
Dave recommends all cash, half of BP recommends all leverage,... you’ll likely find your success somewhere in the middle.
Silly. Debt on investment real estate is cheap and allows us to acquire bigger properties and improve our cash on cash returns.
#5 Investor Mindset Contributor
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- Greenville, SC
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#5 Investor Mindset Contributor
- Investor
- Greenville, SC
Leverage is way down on the list of concerns for many investors. They purchase properties in good locations where the risk of extended periods of vacancy is slim to none.
Reality - most investors are not at max leverage or no leverage...they fall somewhere in between with modest leverage.
Real estate is expensive, and most of us do need leverage to purchase properties. Correctly used, it can amplify your returns. Leverage is always cheaper than having a partner.
Paying cash for me is important when: Paying cash gives the seller confidence in my ability as a buyer. Especially in the days of buying foreclosures, cash deals was a key to winning contracts.
Paying cash also has flexibility for value add deals, where after you reposition and retenant the property, you will seek a mortgage. For those who don't have cash, an interim lending product, hard money, can accomplish the same results.
There is no right or wrong way to build wealth. But one way will get you there much faster than the other. But you have to do what you are most comfortable with.
Some may disagree with my strategy, but I’ve been trying to buy one $100k rental for cash each year. This works for me because I’m extremely risk adverse but it’s not for everyone. Each one typically adds $1,000 per month to my cash flow so after 5 properties, things start to pick up pretty quickly.
@Kai Sato-Franks
We have to remember it’s much easier to borrow money and pay it back, it’s much more disciplined to wait until you have enough money to pay for a property in cash. If you don’t believe me, if you made at minimum 100k and you lived well below your means how hard is it to save up 50 grand a year? In five years you would have enough to buy a duplex in cash for 250,000. .
@Kristian Conway
Not that I’m fully on board with Dave Ramsey’s plan on cash buying investment properties, but I doubt many of you on this forum can pay for a brand new $40 million facility in cash like Dave Ramsey has.. He must be doing something right.
@Kai Sato-Franks I honestly think that Dave Ramsey made poor decisions. These decisions made him change what he used to believe to something that would take forever to gain wealth.
My 2 cents
Buying with a mortgage is a more efficient use of your money. Two key calculations to prove this out:
ROI = Net Profit / Total Investment * 100
ROE (return on equity) = net income/equity
Borrowing will decrease the cash you put up & increase your return relative to the cash out.
It's super important to understand the "why" behind Dave Ramsey. Let us not forget the very reason Dave went bankrupt was because of over leveraging real estate. He had a net worth of over 1 million at the time it happened. Meaning he had 1 million dollars in equity above his debt. Dave Ramsey principles are very much so a "Guaranteed" approach. Meaning, it will work therefore, it is more conservative and less aggressive. Most of us in here don't exactly take that approach haha.
On my first deal I got conned and ended up losing almost 30k. I have experienced a failed project and if I wasn't in a better spot financially it would have ruined me financially. Unfortunately, a partner involved was NOT in that spot and he is suffering from it 2 years later still... A borrower is slave to the lender. Debt basically maximizes the results x whatever you leveraged. If it's a loss your loss is maximized and if it's a gain your gain is maximized. From a personal perspective, I don't disagree with one thing Dave says. Theres no financially logical reason whatsoever that you should go into debt for something personal. If you feel the need to justify a car, then make it minimal. Don't drive a $600/month car riding around with $500 in your bank account...
However, I have used credit cards like its a checking account my whole adult life and It has worked very well for me both in my personal and business life. I have redeemed probably about 12k in rewards cash and have been saved out of about 4-5 fraud cases. Some of which were as high as $20k! It's super important to pay those off every month and NEVER carry a balance. The bottom line is, be responsible and don't over leverage yourself and you'll probably be alright. Never wager more than you're willing to lose. Even if you are completely against Dave. You should probably remember that the man is a multi-millionaire and obviously did something right. At minimum you should question why that is and what you can take away from it.