Monday, July 22, 2013
Real Estate: The Dave Ramsey Way
Dave Ramsey loves real estate. He was born into a real estate family. He held his first real estate license at 18 years old. He made a fortune using borrowed money to buy real estate and then he found himself in bankruptcy court over real estate. Today he still loves real estate. He buys rental property, but he hasn’t sold anything in more than ten years. His real estate holdings act as very large illiquid bonds that are owned for the income they produce. They counterbalance his stock holdings in mutual funds. Dave Ramsey only invests in three things the Lampo Group (his privately held company), stock mutual funds, and real estate. There are only four rules to buying real estate the Dave Ramsey way. I)Buy Slowly and Pay Cash: The burned child fears the flame. Dave Ramsey never borrows any money for any purpose, period. He pays cash for every property he purchases. This is a slow way to start, but those rental incomes start building cash. Then the snowball gets bigger and bigger as it rolls down the hill. Dave Ramsey observes that real estate requires enormous amounts of cash not only to buy property, but for taxes, insurance, and the cost of rehabilitating distressed properties. If you don’t have the cash, stay out of this game. II)Make Money at the Buy: Never buy anything that you can not immediately sell for more than it cost. Don’t think about the future value of the property. Don’t fall in love with a house. You will not be living in it. Buy it because it a bargain. Buy it for the income it will generate, but don’t consider any possible capital appreciation when making your decision. III)Pay no more than 70% - 80% of Today’s Market Price: This answers the question, “How do I make certain that I will make money at the buy?” Dave Ramsey primarily buys foreclosures, distressed property, and bank owned property. He consistently offers cash today. Because he will not pay market price, he hears the word, “NO!” quite frequently. That’s OK. He has time and he has money. Eventually, he will make the deal that he wants. IV)Buy in Your Area: Dave Ramsey believes that long distance management of rental properties is a recipe for disaster. It fills his mind with visions of biker gangs changing the oil in their Harley Davidson Motorcycles in one of his living rooms. He wants to be able to visit his properties on a regular basis so that he can see what is happening with his own eyes. He also wants his renters to know that he is watching them. That is all there is to it. So far I have chickened out every time I have thought about buying real estate other than a primary residence. The first few times I thought about buying rental property or vacation property, I just couldn’t make the numbers work. But in those cases I would have been using borrowed money. This frightened me. Later on I found an opportunity in another city that made sense. I had the cash (barely). But the visions of broken toilets in the middle of the night in another city caused me not to pursue this potential investment.