Dave Ramsey recommends buying everything with cash!

[Kai Sato-Franks]

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.

[Anthony Gayden]

1. A person who is already wealthy or has a very high income such as business owners, doctors, etc. This person has enough money to buy a property in cash. Dave Ramsey himself is very wealthy and can easily pay all cash for any real estate investment. In fact he stated recently he paid all cash to build an office building for his company that cost $70 million. 

2. A person who invests in extremely cheap properties. I'm talking houses that cost less than $50K. These are usually located either in very rough neighborhoods or extremely rural areas. Very low barriers to entry here, even for those with average means. Rarely do you see those who use this method who own more than a few homes. 

There is not a single real estate investing book that I have ever read (and I have read a lot of them) that suggests paying all cash and having no debt on real estate investments in order to build wealth. In fact in most of the books it explains easily why leverage wins hands down. There absolutely is a consensus among experts that debt is the standard way to do business. So the question now is why does Dave Ramsey considers himself a real estate investing expert yet gives advice that contradicts everything that all of the other real estate investing experts suggests. 

My thought is that he knows his information is bad, but his whole company and platform is based on never using debt. He is in too deep to admit that he is wrong and that his method is not the best. 

[Moises R Cosme]

@Anthony Gayden - 100%!!!  

[Justin Thorpe]

@Kai Sato-Franks

Not sure if it’s worth taking such advice blindly and at face value.

With all due respect, the only guys who get rich in this episode are “investment gurus” like Ramsey or Kiyosaki etc are the gurus themselves.

Yup plenty of dollars from talk shows, selling books, tv shows, seminars etc. Like by a factor of a million. All this by telling people the sky is often blue and sometimes grey.

The fact is not many truly wealthy people even know who these gurus are. Most of my wealthy friends (> 10 m in net worth) have not even heard of them. In fact I know a guy who did not do so well in life until he turned a “guru” and started preaching vs investing. I know he was a bad investor but a terrific talker. Now he is doing quite well. Such is the power of the guru industry.

As an investor you have to chart your own course and exploit value. It’s your money and your life and your gut. DR can show you some light but that’s just it

[Kristian Conway]

@Marcus Johnson You're exactly right but how long would it take the average W2 employee to save enough to buy their first property in cash? I look at it from the perspective of leverage and opportunity cost. If I saved for 5 years to buy one 250,000 home in cash, I sacrificed the opportunity to pursue more deals. sacrificing 5 years of appreciation and experience in real estate. I also like the diversification of leveraging properties and not having my life savings in one property alone. 

I'm not saying Ramsey doesn't have great ideas and hasn't done extremely well for himself. I'm saying that I have a different perspective than his when it comes to investing in real estate. I'd love to have $40 mil to buy a facility in cash but I choose to use leverage to get me to that 40 mil.  

[Steve Vaughan]

Originally posted by @Kai Sato-Franks:

Hello,

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?

Not until my portfolio snowball grew after first buying with smart leverage. While saving for years  prices are rising usually.  In 5 years, that house we're saving for now costs $30k+ more. Never catch up. 

Dave is great for budgeting and consumer debt reduction,  but was burned when his commercial / portfolio loans were called on him all at once. He's naturally against loans, but is ok buying your primary home with a mortgage in baby step 3b. 

I agree we should be out of credit card debt, with no auto debt and with an emergency fund prior to buying a primary res with debt. There is room for student loans if househacking IMO.  

[Kai Sato-Franks]

All great advice, thank you!

[Tad Wolfe]

@Anthony Gayden

Great information

[Allan Kuaana]

@Kai Sato-Franks

I believe that one cannot possibly acquire great wealth without using OPM.

I used “good” debt to purchase 6 cash flowing properties this year and am looking for two more. There is no possible way I could have achieved this by paying strictly cash for them. It would have taken me many many years to build up the cash reserves to get this far.

[Kimberly Barton]

@Kai Sato-Franks Using other people’s money to work for you doesn’t tie up your liquidity. Money is “cheap” right now. As long as you purchase smart and have a plan, you should stay liquid.

[Daniel McNulty]

@Kai Sato-Franks

Dave is full of great insights and tips, but purchasing your properties outright is not among them. If you have reached a level of comfort and are no longer focused on growth, then by all means keep that debt snowball rolling. Otherwise, that is not a one size fits all mantra. 

[Jamie DeRossett]

It is always the best option to use cash as that eliminates the major expense (mortgage) with any property. A good friend of mine has made alot of money the last few years buying homes with cash and renting them out and collecting the rental income. Anytime he finds a good deal his dad gives him the money and they pay cash and he collects all the rent. It is a great method if you have the resources. It is a great deal and I really do not see anyway to fail using this method unless you are a absolute idiot. Anytime you can eliminate major expenses (mortgage, realtor fees, contractor costs) that is more money in your pocket and greatly increases your chances of sucess. 

[Mary White]

Dave Ramsey has a lot of great ideas including avoiding consumer debt, but he applies more to those who are risk-adverse. It's best to learn as many approaches as possible and find the combination that works best for you. I've chosen to max out retirement and college savings, but not to pay off my house while we continue to grow our investments and business. Dave's early steps about staying consumer debt free and keeping an emergency fund are two areas that real estate investors should take seriously. Avoiding leverage on investments, however is a major financial mistake. 

[Elijah F.]

Originally posted by @Anthony Gayden:

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 agree. I have listened to some of Dave Ramsey and it seems like his aversion to having a mortgage and real estate investing is because he once had a lot (or all) of his investment mortgages called at once causing him to go bankrupt. Mind you, these were 90-day loans that the bank could call upon when it felt the need to. He was HIGHLY over-leveraged and using a product that doesn't even exist today. So his view, IMHO, on real estate investing is warped and too risk adverse.

[Jim K.]

When you're down and out, haven't the first clue about money, and have spent your whole life on the earn-and-spend debt ratwheel, Dave Ramsey's book is a lifeline thrown to you. Dave speaks most to people who have been psychologically damaged by their debt, their family's debt, the poverty of their communities, who suffer from all kinds of learned helplessness and terrible money habits.

Fix what's deeply wrong first with Dave Ramsey. Get financially healthy. Then move on to other approaches.

[Elijah F.]

Originally posted by @Marcus Johnson:

@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.

Yes, what he is doing right is selling books and seminars on his financial strategies and debt reduction. His over leverage in real estate bankrupted him, so he switched strategies and became a financial salesman. He did not get rich via real estate so his opinion on real estate investing is of no value. One takeaway from him could be to not over leverage oneself in real estate investing by using highly risky investment tools like he did, e.g. 90-day mortgages, and not expect to pay the piper when the sh!t hits the fan.

[Gina Cook]

@Theresa Harris

There’s always investing elsewhere! I invest 6 hours away from where I live because I live on Long Island! 😩 I couldn’t touch a rental property here and it is difficult to get anything to cash flow because our taxes are through the roof.

[Dave Connelly]

I don’t believe Dave is speaking to property investing when he speaks with folk, rather just advising people not to finance another car/boat/jet ski or what have you.

As for financing vs cash purchases, it just depends on your goals, the latter certainly makes it cheaper but the former will allow you to acquire more, define your goals and figure out what you need to do to get there.

But Dave is right, you should avoid taking debt unnecessarily and in this Dave’s opinion without goals all debt is unnecessary.

[Brian Geiger]

@Elijah F.

Dave Ramsey was one of many investors who was negatively effected by the Tax Reform Act of 1986. To give you an idea of how it change the Real Estate industry, the law contributed to the elimination of the capital gains tax differentials, the increase in the period for writing off taxes for depreciable real estate, and the limitation of the deductions of passive investment losses. These changes have reduced the market value of real estate significantly which caused Dave to owe more than what his properties are worth. To add to that, Dave's local bank, where he took out the loans for his properties, either went bankrupt or was bought out by another bank. The other bank called all his loans due. Due to all of this, Dave had no other choice but to file bankruptcy. 

Dave Ramsey offers really good advice on how to be debt free. I used his approach in my personal life and it helped a ton. However when applying this to Real Estate investing for me this did not help as much. I found that it takes way too long to build wealth by saving for the down payment not to mention the full Purchase Price. I rather raise the capital from private partners and pay them a nice return on their capital. In addition I can get higher returns when my properties are leveraged up with a mortgage on good terms and I have investors in my deals.

As I mentioned in my previous post, Dave Ramsey audience are people who made very bad mistakes with money. For investors, I believe Robert Kiyosaki is the better guru because he actually explains how debt can make you rich. And unless you planning to save money for every investment or you are Bill Gates (if you planning to pay cash on all investments), you are going to need some type of debt for your investments at some point. To me Robert Kiyosaki relates more to RE Investors while Dave Ramsey relates more to people who are not financially literate. 

DISCLAIMER: It is important to NOT over leveraged on your investments. Debt is like a loaded gun. It can protect you from tax liabilities but used the wrong way like over leveraging, it can kill you. Hint: Dave Ramsey in the 1980s is an example of this but I will admit that it wasn't entirely his fault. 

[Moises R Cosme]

I want to advocate for Math.  I am re posting my original response to this thread... Dave Ramsey is fantastic as a commentator, but on this issue the advice attributed to him is flat out wrong.  Here are two simple formulas to apply that will allow you to prove this out (look up the formulas, they are probably the most commonly used formulas in all of finance)

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.

[Brandon Penn]

It's different for everyone. All depends on your market, your comfort level with risk, and what your goals are. I personally am 100% leveraged in 95% of my deals. I don't use any of my own money. The big risk with that is if something goes wrong (like COVID). I'm not in a position to just let half my portfolio not pay rent for a month or two, I would be washed out. On the other side I have some friends who own a fraction of what I own, but they make more money monthly and are better positioned in the event of a crises because what they do own is completely paid off. To expand quickly you will have to leverage property.

[Matthew Terry]

The best approach for me personally is to take the best concepts of different systems and "gurus" and combine them into something that makes sense to you. The first steps for DR are solid advice for anyone, but I would be selling myself short if I didn't take advantage of leverage to build wealth as RK teaches. The FIRE movement taught me how to be frugal where it matters, credit card point hack, and other "life hacks to save money, but REI taught me to take that savings and invest it in something that would improve my life immediately through cash flow, as opposed to limiting my dreams just so I can quit my W2 and investing in things with extreme volatility and which I have little control over.

[Bill F.]

Originally posted by @Moises R Cosme:

I want to advocate for Math.  I am re posting my original response to this thread... Dave Ramsey is fantastic as a commentator, but on this issue the advice attributed to him is flat out wrong.  Here are two simple formulas to apply that will allow you to prove this out (look up the formulas, they are probably the most commonly used formulas in all of finance)

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.

Leverage increases returns, but it also increases risks in an amount proportionally to the leverage ratio.  

For some reason the later fact always gets left out of these conversations...

[Marc Rose]

I’m a big Dave Ramsey fan. I think his steps are not just for those who are bad with money, or those who are poor, or those who can’t do math, or a number of other negative things that others in this thread have stated. And he will be the first to tell you that his personal finance methods are just as much if not more focused on modifying behavior to gain control of your money as they are about achieving the absolute best results from a financial calculation standpoint.

I also don’t fault others for having a different view of debt than I do. But those who speak in absolutes about this topic are off base. It’s purely personal preference and ability to execute your plan.

My plan is to buy rental properties with cash. I am blessed to be a higher income earner, so I can do this. It will absolutely take longer, it will be more slow and steady, as I funnel all cash flow towards buying additional properties, and effectively snowball my way to more and more properties. But I don’t ever plan to have to live off of this cash flow. I have separate investments that I plan to live off of once I retire. My rental property business will be more of a second career option and the legacy I leave for my kids and family. I’m anxious to get started, but a few years away

[Ayyub Omer]

I guess you wouldn't be able to BRRRR with the Dave Ramsey philosophy, because he would be against the refinance step. But you could save up the purchase price for your first house, then flip flip flip flip until you have enough extra money to buy a second property then hold. You'd be disadvantaged because you'd be hit with closing costs and more taxes compared to a refinance, and also suffer the other disadvantages of free and clear rentals compared to leveraged rentals which others have discussed at length, but you wouldn't have any debt, and would be safer in the event of a downturn.

[James Hamling]

Dave Ramsey isn't wrong, but he is miles from "right" on how to utilize money because he DOSN'T teach or speak of how to utilize, implement, leverage or deploy money as he dosn't know how to himself, hence the trail of bankruptcies. 

As i said, he isn't wrong, "IF" there was an option to just save up a few hundred thousand and buy that property cash with zero mortgage, yes it is "safe" in the manner that you can screw up and be horrible at finding tenants, managing the property and just overall life as a real estate investor, because there isn't a mortgage payment forcing you to feel the pain of failure monthly. But does that actually make it better? Or is this just easier, with less accountability? 

Dave Ramsey has become famous for helping people with impulse control issues, might not like hearing it but it's the truth and fact. Persons who spend $10 for every $5 they make, living as experts in how to abuse money. Dave's solution is the definition of "Duh", stop using credit, pay things off, live below your means. I am sorry but exactly what genius is in that? That's called common sense where I come from. Yet, people infer Dave Ramsey is some financial demi-God for preaching common sense, and then transfer this over to things so vastly removed such as Real Estate Investing that it's like saying since I am good at driving my car they should let me drive the jet plane I am taking to texas, it's all driving right. 

First giant gaping hole in Dave Ramsey's all cash investing theory: 

- When you buy a property all cash, have no mortgage all those rent payments are income, and income is shared. You get to share it with your state, with the federal government, and fun fact the more you have the more they take. So Dave's great theory should be called The Affiliate-IRS Method because it assures you loose the most capital possible to taxation, capital that via a mortgage is less and put's more capital in your hands to utilize and deploy. 

- Half of REI is about appreciation over time. If you have $100k, you can either A) buy 10 properties for 100K, making for $1m is RE, OR, can buy 1 property at $100k. Rent is $1,000 per unit, per month, properties appreciate 5% annually. 10 years go by: Plan Ramsey, you got $120k in gross rents but as it's all taxable you were left with just $80k of that and $162,889.00 in equity. Plan A) let's say you netted only $200 per month per door, thats it. And since it's just that, you were able to keep 95% of that tiny net, but X10 that is $240,000.00 so at same tax rate you have $192,000.00 net from rents. Lets look at equity gains, your properties have a market value after 10 years of $1,628,894.62. Even if we pretend 10 years payment dosn't pay 1 cent down on the mortgage, under this plan your net returns is $820,894.62 vs Dave Ramseys "I can't control myself" plan of $120K, a $700K difference. A 5X factor difference in just 10 years.

The two don't come anywhere close to comparing, I could walk a class of 6th grades through this math, it's that simple.