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.

[Chinmay J.]

Originally posted by @Zachary Buhler:

@Chinmay J. really? An egghead? The man has hundreds of milllions in his real estate empire using no debt. Unless you have the same amount or more, I don’t think you can call him an egghead because clearly what he’s doing works.

I never said he wasn't rich or successful. It's his one size fits all advice is what I am talking about... 

[Brian Lucier]

Financial Peace University

I am a 2X student of Financial Peace University and I have sat through the class and watched the videos. "CHEETAAAAH" Most of what Dave says is great. Live within your means, do not get into credit card debt, create and stick to a budget. Yup, I drink from that cup of being frugal. But jumping up and down shouting I am debt free while I make a video of cutting up my credit cards  is not the road I am going to travel. Actually, there are two points Dave and I do not see eye-to-eye on - at all. 

Whole Life Insurance Policies. 

Too many details to discuss here, but we use our paid up policy whole-life dividend paying life insurance policy as our own infinite banking system with a "death-benefit" attached to it. This way we get to use that dollar over and over when we need it and pay ourselves back the interest on the loan which goes back into the policy, increasing the available balance we can borrow and the "death-benefit". Once you pay up the policy, you're done. No more payments, the policy stands, and later becomes an annuity we can drawdown in retirement. Sorry kids, I am spending your inheritance, but you still get to redeem the "death-benefit" policy when I croak.

Term policies run like auto insurance. You don't pay that year, you are not covered. Don't get in an accident without coverage. You die the year after your term policy expires - though cookies and milk! Every penny you spent on a term policy is gone the date the policy expires. Hopefully you never needed to use, but stop paying and it's gone. Dave has some strategies for term, but not my cup of tea.

LEVERAGE (20% down = 100% Control)

What can I say. There is no other investment class as powerful, using leverage to buy and control, as real estate. Where else can you put down 20% to control 100% of an asset? If you are clever enough to pool together your money (or even none of your money down) to buy the property, then leverage is an even MORE powerful tool. We have written scores of promissory notes to investors for the down payment of multi-family apartment buildings. In essence, we borrowed the down payment for a set term as a debt position, not equity, made interest payments on the balloon, used this thing called BRRRR, and paid off the investor. The other 80% of the mortgage is paid down every month by our residents who get to enjoy living in the invest property. What a beautiful country!

So sure, we could write a note for the down payment and get in for no money down (money down - just not ours). But let's say we DID have the cash on hand to invest in real estate. If we had $200,000 dollars to play with, we could but an investment property all cash (Thanks Dave) and control an asset for, you guessed it, $200,000. This model also suggests we have nothing left in reserves, which in never a good idea when you are starting out. Let's say we walk a bit more conservative. Let's put down $100k to purchase a $500K property. We now control a $500,000 dollar asset AND still have cash reserves of $100,000. 

Now we have $100,000 in reserves, control $500,00 in property AND the residents are paying down the $400 while enjoying BBQs and flat screen TVs. Obviously, you could blow the whole $200,000 to control a $1,000,000 property, but be operating at a much higher risk without reserves (the bank won't let you do that anyways), and still have someone else (residents) pay back the mortgage. Being debt free vs Debt someone else pays for. Which makes more sense?

Ok, I am not Dave Ramsey, not a talk show host, no courses to sell, not an author, not a celebrity. But we did take a $40,000 down payment from our first property, refinanced that deal twice taking out non-taxable money and reinvested that to buy four more properties from the refi money, which is not income so there is no tax. $40,000 got leveraged into $1,200,000. That was just the beginning of our RE investment journey. 

Sounds like a nice story with a happy ending pending, but Dave would not approve.

[Marc Rose]

Originally posted by @Zachary Buhler:

@Chinmay J. really? An egghead? The man has hundreds of milllions in his real estate empire using no debt. Unless you have the same amount or more, I don’t think you can call him an egghead because clearly what he’s doing works.

Zack, you’re wasting your time trying to make your point with most in this group.  This is an “I love debt” group.  
The fact that Robert Kiyosaki’s principles led him to a recent corporate bankruptcy and that Dave Ramsey’s principles have led him to a net worth of over $200 million doesn’t factor into the equation for folks who do not include risk into their calculations. 

[Zachary Buhler]

Originally posted by @Marc Rose:

Originally posted by @Zachary Buhler:

@Chinmay J. really? An egghead? The man has hundreds of milllions in his real estate empire using no debt. Unless you have the same amount or more, I don’t think you can call him an egghead because clearly what he’s doing works.

Zack, you’re wasting your time trying to make your point with most in this group.  This is an “I love debt” group.  
The fact that Robert Kiyosaki’s principles led him to a recent corporate bankruptcy and that Dave Ramsey’s principles have led him to a net worth of over $200 million doesn’t factor into the equation for folks who do not include risk into their calculations. 

You make a very good point Marc. I know it’s useless to even say anything on these forms because most people love to leverage things on here, but I’m a huge fan of Dave Ramsey and I can’t have people assuming things about him that aren’t true lol 😂. Man, if everyone did their research more about Dave Ramsey before posting on here instead of just saying “well I heard” then we would have a lot more accurate information in this thread.

[KB Collins]

I love Dave and his analysis on debt and how cash is king...  However, as with anything else there are two sides to the story.  Our countries wealthiest people have used leverage - but have used leverage responsibly.  I believe a lot of the pitfalls David speaks of are those situations where the margin between having reserves and not having reserves;  Having $1,000 dollars in the bank and taking on a project that will run in the tens of thousands.  

An Investor leveraging funds who has sufficient reserves, is no where near as vulnerable to a downturn as someone who is leveraged at 90% and has 1 month worth of reserves in the bank.  The model just described is a model of and a recipe for disaster.

Leverage used wisely is a tool and should not be looked at as the boogeyman...

All opinions expressed above are just mine; while eating lunch and pondering Life... :)

[Roy Gottesdiener]

@Kai Sato-Franks

Assuming long term plan is to own multiple rentals that generate income, and you have cash to buy your first deal I'd agree.

You go for BRRRR then you can recycle your capital to multiple deals. If however that's not the case, obviously getting a mortgage and using your cash as down-payment is the preferred option.

For example - I started with $70k, BRRRRed a rental and pulled all my equity out, which I put into another rental and I'm going to extract the equity pit of it as well. Had I gone the other way I'd be stuck with one property and no liquidity.

[Patrick Britton]

i only buy houses with sheep.  definitely my preferred currency.  

[Shane H.]

@Zachary Buhler

If you own more than one home with a mortgage or if you primary mortgage is more than 15 years you've done davish. Which he clearly states repeatedly does not count. Almost everyone agrees with his first 3 steps which is where it sounds like you abandoned his philosophy just like the rest of us.

[Shane H.]

@John S.

As an example...

You buy a property for 275k cash. You had to earn say... $350k to buy it if you pay 20% taxes. And even in a 15% bracket you end up paying more than 20% total.

You buy a property for 55k down. You had to earn 69k. Right from the start you've saved $61,000 in taxes. And assuming a savings rate of 50k per year you've started 5 years earlier. That means 13k of income each year that's added to your 50k savings rate. Buy the time you're buying the first one cash, the guy who financed could either have bought 5 more, or paid cash for a second one....

[Zachary Buhler]

Originally posted by @Shane H.:

@Zachary Buhler

If you own more than one home with a mortgage or if you primary mortgage is more than 15 years you've done davish. Which he clearly states repeatedly does not count. Almost everyone agrees with his first 3 steps which is where it sounds like you abandoned his philosophy just like the rest of us.

 No I’ve followed his steps, when I started his plan I already had the two homes, so now I am working on aggressively paying my mortgage that has $64,000 owed and then I will move onto my other home that has a $240,000 mortgage. If you ever listen to him, if somebody already owns a rental and a primary home both with mortgages, a lot of times he’ll recommend keeping the rental and paying it off as aggressively as possible. Which is what I’m doing now that all of my consumer debt is paid. From there I will save up cash and buy my next rental with straight cash 100% down plan. 

[Zachary Buhler]

Originally posted by @Shane H.:

@Zachary Buhler

If you own more than one home with a mortgage or if you primary mortgage is more than 15 years you've done davish. Which he clearly states repeatedly does not count. Almost everyone agrees with his first 3 steps which is where it sounds like you abandoned his philosophy just like the rest of us.

 Also, I forgot to add that my mortgage with $240,000 owed is a 15 year loan with about 11 years left and my other mortgage is on a 10 year loan with about 4 years left, but I should be paying both off in the next 3-4 years with cash flow and aggressive saving. That’s the beauty of not having any debt, it opens the doors to many wonderful opportunities. 

[Dave Connelly]

Originally posted by @Patrick Britton:

i only buy houses with sheep.  definitely my preferred currency.  

 Ah yes, the BAAAA method.

[Shane H.]

@Zachary Buhler

That's an awesome position to be in. And one you wouldn't be in if you followed the Dave Ramsey baby steps. Because you would no own the investment property. 🤷🏼‍♂️

[Shane H.]

@Zachary Buhler

I listen to him most nights and he regularly tells people to sell the income property. Very occasionally, if the debt to income ratio is absurdly low he will tell them to pay it aggressively. Like if they can pay it off in 2 years or so. At the very most you're saying his plan works if you start with another plan that includes financing an investment property and then switch to his plan and use the cashflow to aggressively pay off the property.

[Zachary Buhler]

Originally posted by @Shane H.:

@Zachary Buhler

I listen to him most nights and he regularly tells people to sell the income property. Very occasionally, if the debt to income ratio is absurdly low he will tell them to pay it aggressively. Like if they can pay it off in 2 years or so. At the very most you're saying his plan works if you start with another plan that includes financing an investment property and then switch to his plan and use the cashflow to aggressively pay off the property.

 All I do all day is drive for my work, so I pop on his podcast every day all 3 sessions. More often than not, he tells people to hang onto the investment property and aggressively pay it off. Occasionally if the property just sucks or a lot is owed on it he will recommend to sell it. 

In my case, I wish I had found Dave Ramsey sooner before I bought my other property. I would have a lot less stress in my life if I had never purchased such a large property on debt. Thankfully though I found him and I refinanced everything to 15 and 10 year loans instead of the 30 year monstrosities that I had before. Yes, I wouldn’t have the investment property if I had found him sooner, but I believe I would be in almost the exact same situation 5 years from now minus just a little bit of rental income. 

[Shane H.]

@Zachary Buhler

If you called him right now, and asked what you should do, if the numbers are close enough, he would ask if you could go borrow the money now and buy it would you. You just answered you would not. Then he would say "then sell it."

Dave ish is a great plan.

[Zachary Buhler]

Originally posted by @Shane H.:

@Zachary Buhler

If you called him right now, and asked what you should do, if the numbers are close enough, he would ask if you could go borrow the money now and buy it would you. You just answered you would not. Then he would say "then sell it."

Dave ish is a great plan.

haha, I’m surprised with someone who knows so much and apparently “listens” to Dave Ramsey that you don’t talk more positive about him. You’re correct, he does say that, but unfortunately the house I bought has my parents who are on disability living in it for free rent, so I couldn’t sell it even though I want to. That’s why the next best thing is to pay it off. No Dave Ramsey ish here, sorry to disappoint you. If it means being able to provide a home for my parents to live so they didn’t have to live on the streets then yes I would be buying this house again.  

[Shane H.]

@Zachary Buhler

Here it is from his website...

https://www.daveramsey.com/askdave/retirement/should_i_sell_my_investment_property

[Shane H.]

@Zachary Buhler

I've heard him tell plenty of people their parents are not their responsibility as well.... I'm not speaking poorly of him. He's a great help to people who are desperate. His first three steps are great. After that you have to do an analysis of your own situation. He invests like it's a hobby. I've heard him give horrible advice at time. A great example, I can't remember the numbers but I'll make numbers up that represent the scenario. Person owns two properties. One as an investment. The investment property nets cashflow of$1000. The primary residence has a mortgage of 900. The equity in the investment property will almost pay off the primary residence. He recommended selling the investment property, paying the mortgage, and then aggressively finishing off the mortgage. Wait a second. They just lost $100/month AFTER they pay off the primary residence out of their own pocket. That's what I refer to as financial malpractice.

I would love for you to call his show with your situation and see what he would tell you. I listen to him regularly and he would call that Dave ish. You literally said if you found him sooner you wouldn't have bought it, and that you'd be in the same position. Then when I pointed out that he would tell you to sell it because of that you changed your response and said you would buy it again. That's Dave ish. And there's absolutely nothing wrong with Dave ish! I'm a huge advocate of it!!

[Zachary Buhler]

Originally posted by @Shane H.:

@Zachary Buhler

I've heard him tell plenty of people their parents are not their responsibility as well.... I'm not speaking poorly of him. He's a great help to people who are desperate. His first three steps are great. After that you have to do an analysis of your own situation. He invests like it's a hobby. I've heard him give horrible advice at time. A great example, I can't remember the numbers but I'll make numbers up that represent the scenario. Person owns two properties. One as an investment. The investment property nets cashflow of$1000. The primary residence has a mortgage of 900. The equity in the investment property will almost pay off the primary residence. He recommended selling the investment property, paying the mortgage, and then aggressively finishing off the mortgage. Wait a second. They just lost $100/month AFTER they pay off the primary residence out of their own pocket. That's what I refer to as financial malpractice.

I would love for you to call his show with your situation and see what he would tell you. I listen to him regularly and he would call that Dave ish. You literally said if you found him sooner you wouldn't have bought it, and that you'd be in the same position. Then when I pointed out that he would tell you to sell it because of that you changed your response and said you would buy it again. That's Dave ish. And there's absolutely nothing wrong with Dave ish! I'm a huge advocate of it!!

No I definitely hear what you’re saying man and I appreciate you. I know my parents aren’t my responsibility, but before I found Dave’s plan I made a deal with them that I would buy their house from them at a deal (because they were about to get foreclosed because my dad lost his job due to his leg getting cut off from diabetes) and in return I would let them live there rent free for as long as they needed. If I had found Dave Ramsey before, I would have never made that deal with my parents and instead would have kept paying off my home. Unfortunately, I made a promise to them before I found Dave so although your sunk cost analysis is correct that I wouldn’t buy it again today, at the same time I can’t sell it because I gave my word that they could live in the house rent free. 

Sorry for not being very clear about it before, just with life there’s a lot of baggage and things that come. I would love to call in and get his advice, honestly he might tell me to sell it, I don’t know for sure. I do know that he is a man of honor and if he made a deal with someone he wouldn’t go back on his word, which is why I can’t go back on mine even though I believe it would put me in a better place financially. 

Yeah, I see what you’re saying with the example of selling the investment property to pay off the rental. Based purely on cash flow it sounds ridiculous, but life and real estate isn’t always about cash flow. I’ve enjoyed talking to you about this and would love to hear any other thoughts you might have on it. 

I know that I’m not going to change your mind, but I’m a garbage man and my wife is a school teacher and I’m only 26 and right now we have around a $530,000 net worth. So if I can follow Dave Ramsey’s plan and do this good, anyone can do it too.

[Shane H.]

@Zachary Buhler

No need to change anyone's mind, just making the point that he has a great framework, but just like anywhere else in life you take such framework and adjust it to your situation. Which is exactly what you are doing. Which is awesome! You're doing great. Keep it up. And I believe you're right that once the promise was made he would tell you you're stick with it unless it was totally breaking you financially which it is not. I'm doing Dave ish myself. I'm refuse to pass on home run deals because I have debt. But my debt has been decreasing with time. I will be personally debt free this year. My businesses will still hold debt. And that won't very change. I believe in using debt for business, but not personally. Maybe someday I'll make so much money that I can finance business ventures with cash. Which is the situation he's in. But he didn't make that fortune in real estate. He uses real estate to hold his wealth more than anything. I prefer precious metals for that and I use real estate as an income driver. I would never get where I want to go with the wage I make if I followed his plan. I would have to work until I'm 70. I have zero interest in that. I'm on teach to be financially free by 40. (That doesn't mean retired. Just free.) I mixed Robert kiyosaki and Dave Ramsey's plans together. I bought my first investment property for cash. I paid off my house. But I regularly use credit to run my business and I would not change that. Ever. I'm using someone else money to create my wealth and I have no regrets about that!

[Zachary Buhler]

Originally posted by @Shane H.:

@Zachary Buhler

No need to change anyone's mind, just making the point that he has a great framework, but just like anywhere else in life you take such framework and adjust it to your situation. Which is exactly what you are doing. Which is awesome! You're doing great. Keep it up. And I believe you're right that once the promise was made he would tell you you're stick with it unless it was totally breaking you financially which it is not. I'm doing Dave ish myself. I'm refuse to pass on home run deals because I have debt. But my debt has been decreasing with time. I will be personally debt free this year. My businesses will still hold debt. And that won't very change. I believe in using debt for business, but not personally. Maybe someday I'll make so much money that I can finance business ventures with cash. Which is the situation he's in. But he didn't make that fortune in real estate. He uses real estate to hold his wealth more than anything. I prefer precious metals for that and I use real estate as an income driver. I would never get where I want to go with the wage I make if I followed his plan. I would have to work until I'm 70. I have zero interest in that. I'm on teach to be financially free by 40. (That doesn't mean retired. Just free.) I mixed Robert kiyosaki and Dave Ramsey's plans together. I bought my first investment property for cash. I paid off my house. But I regularly use credit to run my business and I would not change that. Ever. I'm using someone else money to create my wealth and I have no regrets about that!

 Nice that’s awesome! You sound like a really smart guy and if whatever you’re doing is working for you then there’s no reason to change. Good luck in your business endeavors and congratulations on almost becoming debt free on the personal side! That’s fantastic. Keep up the good work man! Great discussion. 

[Elijah F.]

Originally posted by @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. 

Dave may have become a victim of circumstance, but it was a circumstance he put himself into. He was highly over-leveraged and hoped the laws/market wouldn't change while he was taking on too much risk. In turn, he now preaches that people should buy, with cash, real estate. It's that message I have an issue with because real estate (most of the time) requires leverage (i.e. debt) in order to grow successfully. Dave became rich by pandering his financial system (not a dig on his hustle), not via real estate. I do agree, however, in his teaching of reducing debt using the snowballing method. It is counter intuitive and more costly a method, however, given the psychology of financial/debt stress, many people (some I personally know) have had success using this strategy. 

[Matt K.]

It makes little sense to me to pay off my primary even if I had the money to do so. Loans are so cheap right now I could rather easily and consistently at a minimum match my interest rate at pretty low risk and probably beat it.

Plus, being my primary if I for some reason needed the cash I'd either have to finance it or sell it to access that cash. If the later, it'd no longer be my primary... On the flip side if the funds were elsewhere I could sell off whatever they were in and still maintain my primary and likely cover the debt for many years as worse case.

With that said, also not a firm believer in high LTV to allow for swings on value...

[Lesley Resnick]

NO one will ever get rich on Dave Ramsy's advice or Robert K.  Unless of course you name is Dave or Robert.  There is no one answer for everyone and for all times.  Their advice is generic and made to entertain a mass audience. The world changes constantly and how much cash or leverage you use should be constantly re-evaluated and decided for yourself.

Should you not take a zero percent car loan or credit card?  It depends on your own discipline.  Does that mean you will buy a car you otherwise could not afford or need?  Will you take an expensive vacation you can not afford?  

I am an agent and a decent car is a business requirement for me.  I do not drive a 90k BMW nor did I pay cash for the car.  I used the local credit union to finance it.  They loaned me the money at 2%, I am borrowing private money at 10% for my real estate projects.  I fail to see how it would make sense for me to pay cash for the car.