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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.
thanks Joel Florian. I really think the leverage works, but as you mention, there are some people that forget that each one is different. I came to US in 2007. I met my neighbour that at the time was a RE Investor. His wife was so proud that with no much money, he created "a large amount of income and net worth". he was leveraging like hell. i dont have to say it did not end up well. 2008 crisis got him deeply. they lost everything and moved to live with her parents. What most people forget is that numbers NEED to work in long run.
Leveraging is beautiful, but reserves are crucial to absorb repairs, vacancy etc. people here discuss leveraging and do the math with all money towards to many properties. wheres the reserve in equation? and if some maintenance comes, if vacancy grows, what would they do? i even saw posts mentioning appreciation... what if theres none? people thing rental is a waste of money... well in the rent you have to thing that taxes, insurance, are included... so dont factor rental x 12 x yrs to see how much you wasted... you will have to pay those if you buy your house...
I am old fashion. the more i read about Dave Ramsey’s model, the more i think its appropriate for me. Nowadays i have my houses generating 20 k per month in rental (i put aside 7 k for taxes/etc) giving me 13k free cashflow. i can buy a property every year and generate more and more. thats what i like in my model. if vacancy is zero...? well i have nothing to worry..
Dave's model teach people more than the ROI/ROE model. teaches how to manage money from the basis. I strongly believe that less than 20% of the people have enough discipline to spend/invest properly. if you are not one of them, Dave's model is a must.
@Alexandre Marques dos Santos Your post provoked another thought: earning and saving money tends to train a person's mind to be realistic. Borrowed money is an abstraction. I know how much effort and inconvenience went into all the years of building my life savings. Future effort to pay a mortgage is theory and may be harder or easier than my previous 20 years. Therefore, I tend to make much more conservative decisions with saved money than I do with borrowed money.
Also, an inflationary environment is favorable to a debt based economy. And with the Fed printing money, continued inflation seems likely. Inflation is not guaranteed. Nor is appreciation. Nor is rent. Deflation could be crushing to leveraged investors. Simultaneous falling RE prices could be equally devastating. Debt only makes sense in the US because our government is deeply in debt (as with many other countries). My mom always says "Two wrongs don't make a right." The government's irresponsible fiscal policy does not justify my personal bad decisions.
Ramsey has sound advice for those trying to get out of bad debt...i.e. cc, student loans, medical etx. but as an investor it doesn't make sense.
Example: $200,000 property and for discussion purpose 1% rule so monthly rent is $2000 month. All expenses will be the same i.e. taxes, ins. repairs etc. If you get a mortgage or not therefore lets estimate at $9,300 for the sake of a post.
So all cash purchase $2,000/mnth. annualized is $24,000 a yr. - $9300 expenses = $14,700/$200,000 purchase price = 7.3% ROI
Mortgage assuming 20% down ($40,000) your note @20 yrs. & 4.75% (I just got that yesterday on my next deal) your payment is $1,034/month or annualized $12,408. $24,000 rent income - $12408 payments = $11,592 - $9300 = $2,292/$40,000 = 5.7%
7.3% cash > 5.7% in this example HOWEVER...with the mortgaged property I only spent $40,000 therefore $200,000 cash in hand - $40,000 = $160,000 left to do another deal and another deal. Additionally, I amortized it on 20 yr. (my preference) I have recieved 30yrs notes as well which would lower my mortgage cost and increase my NOI and Rate of Return.
the BIG caveat here is appreciation, the other factor in investing in R.E. All cash property you have 1 property assume a 10% in say 5 yrs. now worth $220,000 vs. mortgaged properties (estimate 4) same 10% equals $880,000...no brainer
@Kai Sato-Franks got me I understand what DR days and eventually I will buy everything cash but to start I will leverage! I just bought my first investment property and will BRRRR my second one and then focus on those two properties. Pay the first one off then use the cash flow on both to save and keep buying until my cash flow is around 9-10k a month where I can truly save to buy 1 a year with 100k plus from the cash flow it will take long but not as long as DR methods
Originally posted by @Joel Florian:@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, thanks for saying this so clearly. Question for you - do you happen to know which BP podcast episode has the guy who invested with all cash? I’d love to hear that one. Thanks
Aside from the fact that Im just not a Dave Ramsey fan, i think that his advice in real estate investing is terrible. You can grow much faster using the power of leverage. Its a fact!!
@Matt Smith
You're not crazy but you're not following his steps. Lol which is fine. His steps are a decent base model to be expanded on and altered to individual situations. His biggest flaw in my opinion is his refusal to admit that. He insists that a slight alteration is davish, and is destined for failure. I have a lot of respect for Dave. He's helped a lot of desperate people. But for those who are not desperate and simply trying to pursue bigger and better things, he lacks in flexibility. There is nowhere in his baby steps where you can start a business until step 7. In step 7 you can basically dump money wherever you'd like. Before that there's no step for saving to start a business, and he doesn't want you to use debt to do so. Therefore unless you're willing to be an employee for many years until you reach step 7, his plan will not work. He also does not approve of house hacking. He would tell you the moving expenses and the aggravation are not worth it. And this is why your numbers do not work under his plan. If you were buying a sfh, you could save the down payment much quicker. And his steps would work. They just aren't designed for a entrepreneurially minded individual.
If you followed a blog that told you the math didn't matter, you should do this instead, and then gave you an affiliate link to an investment that was mathematically inferior you would likely stop taking the advice of that blogger. Dave's the original. Lol
@Brent Salazar
Get rid of the truck. Lol that brings you to 38%. Then find a better lender who will let you found all the income to get to 32%. Just my two cents!
What happens if you have a mortgage on a rental property, the tenant stops paying, and you lose your W-2 job and are therefore unable to pay the mortgage? If you buy with loans instead of buying outright, how would you pay the mortgage in this situation?
@Laura Walker. Prudent investors keep reserves to bridge gaps. Having no cash reserves would be a problem with or without a mortgage since most of us have other costs (taxes, insurance, upkeep, HOA, utilities). If a tenant stops paying, start the eviction process or whatever the proper legal pathway to get them out. And get it rented again. If you had absolutely no reserves to pay the mortgage, you could probably get it re-rented before your loan was foreclosed (since the foreclosure usually takes several months) Dave Ramsey would never recommend paying cash for an investment property with less than 3 months emergency fund. In his words, that would be "stupid."
Quote from @Laura Walker:
What happens if you have a mortgage on a rental property, the tenant stops paying, and you lose your W-2 job and are therefore unable to pay the mortgage? If you buy with loans instead of buying outright, how would you pay the mortgage in this situation?
This is an interesting discussion. I'm pretty risk averse and we did follow Dave's plan to get out of personal debt, but obviously having no debt doesn't equate to retiring early. One needs an income, and we didn't have umpteen years to wait, so we started investing in RE using leverage.
Years ago we dabbled in RE and lost our butts. This time we studied multiple exit strategies and ultimately we found a nice balance that seems to work. Here's the strategy we used to reduce leverage risk (and stress):
Eliminated primary home payment and structured rental financing so the total monthly payments combined are not more than our previous personal home mortgage payment. This way we knew we could handle it. (how? downsized primary home big time, then bought properties at discount, built sweat equity, etc).
We don't live on the rental cash flow while growing our portfolio. We reinvest it all back through renovations, acquiring additional properties, or accelerating mortgage payments.
We keep minimum 6 month reserves to weather storms. We did have renters stop paying during covid and couldn't get them out for 1 year. Yikes!
We keep a mix of long and short term rentals in different areas. This reduces the risk of not getting any income, if one or two stop paying, the others still are. Plus a short term rental offers you a place to stay if, god forbid, you had to sell your primary house quickly.
To raise cash we are now throwing in a flip here and there (buy, renovate, short term rent for a while, then sell after 1 year to reduce taxes). This way we don't take on more debt as the cash will then buy additional rentals.
Last, but not least, we aren't giving up. When we finally evicted the covid non-payers, two houses sustained thousands$$ in damage. Got a call last winter that the furnace went out in one of our houses, then the pipes froze. Ahhhhhhhh! Pedal to the medal - increase w2 pay, extra job,etc.
I keep a balance sheet and update every 3 months. I'm shocked at the difference (upwards) since we started this journey. This is what keeps me going.
Everyone's situation is different. We aren't looking to get super rich, just enough that we can sail off into the sunset in 4 years. I mean that literally, we are buying a sailboat and sailing around the the world.
For what it's worth, my advise is to look around you, exploit the opportunities your own situation affords. Do not discount leverage, cause others say to. Do not jump headfirst into debt to get rich quick. Get out your spreadsheets, crunch some numbers, beef up your skills, get your hands dirty. There's a world of possibilities, you just have to think creatively.
Good luck y'all!
@Heather K. have you considered buying or building a STVR and then NNN leasing the property to a manager locking in a cash on cash return of 15%+. It's a way to minimize risk with RE while getting a greater return than a long term rental. Consider a 1031 exchange out of an existing property.
Quote from @Todd Goedeke:
@Heather K. have you considered buying or building a STVR and then NNN leasing the property to a manager locking in a cash on cash return of 15%+. It's a way to minimize risk with RE while getting a greater return than a long term rental. Consider a 1031 exchange out of an existing property.
Can you tell me more about this?
I leverage debt to make more money by purchasing more investments. Using all cash to purchase investments is silly! Why wouldn't you leverage yourself to do more deals?