Does Ramseys Story Apply To Todays Investor
I think even Dave would admit that his bankruptcy was something that would be very hard for anyone to duplicate in todays market. There are many more rules and regulations in regard to financing and banks. There would be almost no investors buying long-term rentals with 90-day loans.
While I can understand why Dave says dont use debt, using his life as an example does not make sense. I would want to know how an investor can lose it all with todays loans and regulations. I am not saying you cant go bankrupt, but we need to compare apples to apples.
There Is No Such Thing As Good Debt
When referencing good debt and people believe that you receive great benefits by going into debt, Ramsey writes, Give me a break! These guys are idiots. Whats more, they are probably broke idiots.
Those of us in the Rich Dad camp strongly believe in leveraging assets to buy more assets. I understand that some people want to carry no debt whatsoever. Youre welcome to take that road, especially as you near retirement. However, if you have $100,000, you could buy one house for cash and carry no debt or you could leverage that money and buy five houses with 20% down, exponentially increasing your income.
There are investors from both sides of this argument, and it is really a matter of personal preference. However, I would not assume the guy that leverages assets is a broke idiot.
Some people might argue how leveraging burned a lot of people in the 2008 crash, which is true. Over-leveraging is a dangerous game, but an income-producing property is still an income-producing property, even in a crash assuming you set it up right in the beginning. Abusing HELOCs and adjustable rates might burn you when the market slides. It all comes down to structuring the deal.
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Why Does Dave Ramsey Think You Should Not Use Debt
Dave refers to his own bankruptcy many times on his show and in his teachings. He blames real estate for his going broke, and not just real estate, but using debt with real estate. While it may be true that debt and real estate sunk Ramsey, there are some things to considersuch as the fact it would be basically impossible for any investor to invest now how he did back in the 1980s before going bankrupt.
I do not have actual knowledge of exactly how Dave Ramsey was investing, but he does admit over and over he had 90-day loans. A 90-day loan means that 90 days after you take the loan out, the bank can call it due. It is very tough for anyone to get a 90-day loan, and they are almost unheard of in real estate today. What Dave was doing was extremely risky, and using 90-day loans means he may have to pay off a lot of debt at any time.
I flipped 26 houses last year and 26 the year before that. I use plenty of debt to flip that many houses, and while loans for house flips are typically riskier than other types of real estate loans, even they have a 1-year term. Most loans for residential rental properties have a 15- or 30-year term. Some loans for commercial rentals can have much shorter terms: 10 years, 5 years, or even 3, but nothing close to 90 days.
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How Will You Use Debt In Real Estate Investing
Ive made my own choices about using good debt in my business. But I also recognize there are multiple ways to accomplish the same thing.
For some of you, a no-debt, Dave Ramsey-style strategy might work fine from the start. You can check out my All-Cash Plan to Free & Clear Real Estate for a step-by-step wealth building guide.
Others of you may choose to use debt as a tool, but then you want to pay it off as you approach financial independence. You can check out my Rental Debt Snowball Plan for a step-by-step wealth building guide using that strategy.
Still others may use leverage very heavily and trade your way from small properties to enormous multi-unit apartment empires. You can check out my Trade-Up Plan for a step-by-step guide to this wealth building approach.
Youre the one who must be comfortable with your decisions so that you can sleep at night. So think for yourself, weigh your options, and most importantly move forward with your own investing.
Do you have an opinion about using debt in real estate investing? Is debt dumb? Or is it smart? And if you use debt, what are your rules to invest safely? Id love to hear it in the comments section below.
Invest In Real Estate The Old
Real estate is a great investment, but you need to know what youre doing, and you should be passionate about it. Start by learning about real estate from a prolike one of our real estate Endorsed Local Providers .
A real estate ELP can educate you about the types of properties you can buy and what types of renters you can expect. They can help you get a deal. In real estate, money is made at the buy. Our ELPs can teach you to be patient so you can buy real estate like a profor pennies on the dollar.
To invest in real estate the smart way and keep your financial risk low, you need to answer yes to the following questions before you start investing:
- Are you completely debt-free?
- Do you have an emergency fund of at least 36 months of expenses?
- Are you contributing 15% of your income to retirement?
- Are you able to pay cash for your investment property?
And because HVACs break down and garbage disposals stop working, its a good idea to have money set aside for upkeep and repairs. As a landlord, thats up to you.
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Avoid Debt As Much As Possible
If theres one thing that Dave Ramsey hates, its debt. Much of his financial advice is built on the premise that debt is bad, and it needs to be taken care of as quickly as possible. According to Ramsey, Debt is not a tool it is a method to make banks wealthy, not you. The borrower truly is slave to the lender.
So, avoid debt whenever possible. That means limiting your use of and minimizing car loan and home mortgage payments.
Do You Make More Money With Loans
Dave suggests that whenever you buy a rental property, it should be purchased with cash, and you should get an awesome deal on it. I completely agree about getting an awesome deal on the property. He even suggests using the 70% rule to buy rentals, which is often how house flippers decide whether a deal is good enough to flip or not. He also suggests people have an emergency fund, which I agree with as well. So, what would it look like if you bought a rental property with debt but had an emergency fund and bought it at 70% of the after repaired value minus any repairs needed?
- Value of the property after repairs $200,000
- The property needs $15,000 in repairs
- That means you would buy the property for $125,000
- If you put 20% down, which most banks will require on an investment property, your loan will be $100,000
- You will have some closing costs and other expenses, so you probably spent about $45,000 buying the property
You now have a house worth $200,000 that you bought with $45,000 cash, but what will it make each month with leverage?
- Rent would be about $1,500 a month
- The mortgage payment would be $500 on a 30-year loan at 4.5% interest
- You would have taxes and insurance which could be $250 a month
- You need to account for vacancies and maintenance which could be $300 a month
- You want a property manager who is $150 a month
You are making $300 a month after paying all the expenses. Not bad, but think how much you would make if you paid all cash!
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Dave Ramsey Part : Horrible Advice
I was hoping not to re-visit this subject again, however, I received a phone call from a fellow investor who received some real bad advice from Dave Ramseys radio program.
First, let me state Im going by what she told me and I am basing my comments on the substance of the phone call to me, but I can tell you that I strongly disagree with what Mr. Ramsey teaches more about that later.
Darlene explains that she called Daves radio program to refute what he has been saying on his radio program about now is a great time to buy a house. She did get on the radio to ask the pointed question, but as soon as she asked the question, Mr. Ramsey became angry and coarse, and stated anyone with a half of brain can see what great opportunities are out there for home ownership! What a great posture for a national radio personality to take when the general public calls in with a request for help and clarification, Darlene said she decided to take Daves advice and bya house 3 months ago, and since that time she has lost 5 % in value!
She read my back issues on my blog and noticed I was not a fan of Daves, and have clearly stated for the past 15 months that you should not be buying anything in this market, rather you should be using leveraged strategies such as lease options for investments and personal residences.
In the words of Forrest Gump thats all I have to say about that.
How Does Bitcoin Work
Each bitcoin is a computer file stored in a digital wallet on a smartphone or computer.
Its powered by open-source code known as blockchain. This is a digital ledger that tracks the creation and movement of each Bitcoin.
Because its public and decentralized, anyone with internet access can view any transaction in the networks history.
This gives the blockchains history full transparency while users identities remain anonymous.
Within each digital wallet, theres a public key and a private key. Both of these work together to allow the owner to initiate and digitally sign transactions, providing proof of authorization.
Think of the public key as your home address. This is what you give to people in order to receive money. The private key is similar to your homes key to unlock the door. This allows you to keep your cryptocurrency safe.
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A Simple Investing Plan
Once youve completed the first three Baby Steps, youre ready for Baby Step 4investing 15% of your household income in retirement. This is where things get really exciting! Youll get the most bang for your buck by using tax-advantaged investment accounts like these:
Pre-Tax Investment Accounts
- Roth 401
- Roth IRA
If your employer matches your contributions to your 401, 403 or TSP, you can reach your 15% goal by following these three steps:
Does your workplace offer a Roth 401? Even better! You can invest your entire 15% thereif you want to. Just be sure the plan offers plenty of good mutual fund options so you can make the most of your investments.
Not sure how much youll need to retire? Plug your numbers into our investing calculator and find out.
When Debt Is Dumb In Real Estate Investing
Debt is inherently risky because payments must be made whether or not your asset continues to produce income. What happens if, for example, your tenant moves out and tears up the property? That doesnt matter to the lender. You may have to make payments for months without receiving any income.
If you dont have large cash reserves to compensate for that risk, then debt is dumb. I shoot for about 6 months of total principal, interest, taxes, and insurance payments sitting in cash. If you have a lot of loans, this means you need to hold a lot of cash.
Debt is also especially risky when you have large lump sum payments that must be paid off. If your balloon payment is due and you dont have the money or the credit, the lender is in control. In this case, debt is VERY dumb.
Just ask Dave Ramsey. Balloon notes contributed to his own real-estate-related bankrupty in the 1980s.
And just ask once mighty banks, big businesses, and real estate investors during the 2008-2010 financial crisis. Because of a global financial meltdown, these borrowers could not come up with the money to pay off their balloon debts. Even though they had good credit and strong businesses, their lenders said pay us our money!
So, using debt carelessly CAN be very dumb. And perhaps more than any other business, we real estate investors blindly take on excessive risk in the name of the debt is good mentality.
To use debt more wisely, here are some rules Ive created for myself to determine good debt.
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Housing Market Predictions For 2022
The housing market exploded like fireworks last yearand many of those sparks may continue flying in 2022.
Experts are still seeing a post-pandemic reboundwere talking steady mortgage rates, job recoveries, and the law of supply and demand all working together to make home sales go kaboom!
The final four months of 2021 saw home sales rise in September, October and November.1 And even though sales dropped a little in December, they were still up from the year before.2 Theres high demand with low inventory, so buyers are still rearing and ready to enter the market.
Heres an overview of what experts predict will happen in the housing market leading into 2022:
Housing Market Stats
To help you put those home prices into dollar signs, the median home cost rose to just over $346,900 last yearthats more than $50,000 higher than in 2020!4 And certain months saw even higher median home price spikes. For instance, the median home price was $358,000 in December, which set us up for more sky-high prices leading into 2022.5
And lets not forget how interest rates will affect the overall cost of your home! Last year, interest rates were at an all-time lowanywhere from 2.152.39% for a 15-year, fixed-rate mortgage or 2.743.10% for a 30-year, fixed-rate mortgage.6,7
Who Needs Dave Ramsey
People with little financial knowledge or discipline absolutely need to read and follow Dave Ramseys advice. I was a bankruptcy paralegal for many years, where I learned what debtwhen used improperlycan do. Ramsey provides solid advice for increasing income, building an emergency fund, and using the snowball method to pay down debt. If youre unfamiliar with these activities, by all means, read Dave Ramseyor almost any other conservative financial advisor.
Consumerism controls our society. Dont believe me? Consider Christmas. It sickens me to see people pile on debt to buy mostly useless itemsor even worse, the families destroyed with guilt because they can not provide adequately for Christmas. If you find yourself drowning in credit card debt, Dave Ramsey is a good place to start to dig yourself out.
Nevertheless, there are several areas in which his advice is lacking.
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What Does All This Mean For Home Buyers In 2022
Okay, it looks like youll still need to bring your A game if you want to buy the home of your dreams in this market. With more buyers than sellers, youll probably be up against some heavy competition, high housing market prices, and maybe even a bidding war.
Another downside: Signs are showing that the low inventory issue is going to hang around for a while. Home inventory did increase a little last fallrising to a nearly seven-month supplybut it didnt stay that way.19 At the tail end of the year, inventory tanked to just a 1.8-month supply.20
And while homebuilders are confident theyll do plenty of business in 2022, that doesnt mean buying a newly built house will be easy for you.21 Rising prices, supply shortages and even government tariffs are all making it crazy hard for homebuilders to actually build enough houses to keep up with demand.22,23
Translation: The pickings may be slim when it comes to buying a house. That means you may have to give up some of your wants to get a house that has everything you need.
But dont worrytheres a bright side for buyers too.
If youre getting a mortgage, interest rates are still looking as good as a blue snow cone on a hot summer dayfor now. But like we said at the beginning, theyre slowly inching up and will likely keep increasing in 2022 .
Daves Crypto Investing Recommendation
On other parts of Daves website, he continues that Bitcoin is complicated investment to understand making it too risky.
In fact, he described it as downright mysterious, as well as a very volatile investment that could easily rise either 300% in a year or see the bottom drop out.
So now it seems that Dave has made it clear to NOT invest in cryptocurrency due to concerns about:
- it being a volatile asset
- lack of regulation
- short track record of steady growth
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