Keep Investing vs. Paying Off Debt (Dave Ramsey)

all right we're back with another version of our reaction videos this week i'm reacting to a video from dave ramsey we've already done one video from him before uh obviously dave ramsey is anti-debt the title of this video is keep investing in real estate or pay off debt now you all know my opinion on debt it's like a tool let's call it an ax so with a sharp axe you can cut down a tree a lot faster than you could without it but you could also chop off your foot if you don't know how to properly use it and that's exactly what debt is when it comes to real estate it's a tool if you use it properly it is actually a wealth building accelerator so let's see what dave ramsey's take on debt versus real estate does kyle is with us in new york hi kyle welcome to the dave ramsey show hey dave how you doing better than i deserve what's up hey so i'm uh a real estate guy i got my license shortly after you did i was 22 when i got my real estate license and i've been in the business about 14 years uh heavy on the investment side getting your real estate license is one of the best ways to get started as an investor by the way we've talked about that a couple of times on this channel before actually check out this video here on the five ways to buy commercial real estate with little to no money down because it's actually a strategy that i used to buy my first office building was getting my real estate license and using the commission as equity towards the down payment so if you're interested in getting into real estate investing and you don't know where to start getting your real estate license and starting off as a broker is actually a phenomenal way for you to learn from the ground up that's been said i'm at a portfolio rental portfolio that's about 3.5 million dollar net worth um about a 68 equity position in it and i did a calculation he just said he had a 68 equity position in his rental property portfolio and that is crazy high to me crazy high that means that he's only got 32 debt on his properties if you run the numbers on his return on equity which is a that's an investment measure that people don't use often enough if you run the numbers on his return on equity it's probably very low the longer you own a property the more equity that you build up in it and that's trapped equity that is essentially just there right it doesn't provide you any more value you're not getting any more cash flow off the property just because you have more money in it it's wise to go out if you know how to properly use debt and refinance that property put more debt on it as the rent roll will allow and take that trapped equity to go uses a down payment on another property it's a great way to to really snowball your portfolio so hearing a 68 equity stake in his portfolios is kind of crazy to me relatively new fan and i appreciate all the stuff you're putting out there and so i did a calculation to figure out what it would actually take if i used all of the cash flow to point right at the debt how long it would take to actually pay all of it off which i came out to about 10 years and three months but i guess my question is value in doing that versus value on continuing to use the cash flow to grow the portfolio which he actually has a good question here right and i get this all the time should i be working towards owning all of my real estate debt free right he just said if i pointed all of the cash flow back towards paying off the debt that means that he wouldn't take a dollar out of his property she'd be putting it all back towards paying off the note faster and to me i don't see the value in doing that i actually think that it negatively hurts you because think about this you can own one property with a hundred percent down or you could own five properties with twenty percent down and eighty percent debt to me the diversification of owning five properties instead of one outright as long as you know how to properly use debt it's a way better strategy i mean hands down way better strategy portfolio which to date is basically what i've been doing yeah okay so you've got a top-line asset base of three and a half million not net worth uh correct yeah total total portfolio value is 3.3.55 equity is 1.132 so what do you got 14 15 properties right about there yep yeah okay cool good for you well done very well done and you're you're in a 70 equity position meaning you only have 30 of it in debt so less than a million dollars in debt uh no reversed oh so 68 leverage oh okay that makes a lot more sense so he just said that he actually has 68 leverage on the properties to me that's actually a phenomenal position to be in i love that 30 equity stake 25 equity stake there's nothing wrong with 20 or even less than that but once you start getting into 20 or below it just becomes inherently riskier if things should happen right but really that sweet spot for me in my opinion as a commercial real estate investor being in that 25 to 35 range is ideal anything higher than that and i need to refinance and pull some cash out and go buy another property anything lower than that i want to stay in it for a little bit longer what the deal season and hopefully my equity will appreciate okay so you don't have a ton of cash flow uh it's about uh monthly after all expenses mortgages you know capex everything is around 70 700 a month yeah yeah that's not much okay that's what i thought i thought it was tight um let's run the math on that 7 700 a month net on three and a half million dollars in real estate so he said he has about a 32 equity stake in his property which on three and a half million dollars is about 1.1 million in equity right so if he's getting 7 700 a month times 12 divided by 1 million 120 000 he's getting about an 8 percent net cash on cash return on his properties every year that's not bad right i mean he's cash flowing eight percent off of his assets with debt uh now could it be better of course i mean i wouldn't invest in anything that's below you know really a 14 but not everybody has access to the deals that we have so it's it's kind of a give and take one thing too though that's great about commercial real estate he's probably not taking into account depreciation or any write-offs you can get through a cost segregation study check out this video here on that that is one of the best tax advantages you could ever get out of commercial real estate one caveat that i will throw on that is that i don't know what his debt service is so i don't know what that could possibly add back into his cash flow so it would probably go up from about two and a half percent but i can't imagine it would be that much right so it's still a very low return um i mean 700 months a lot of money but not on three and a half million it's not so um that's that's you know okay here's the thing you said you're new to all this here's what i went through um we had about four million dollars worth of real estate um and uh owed about three on it so we're in about a seventy five percent ratio um some of that a percentage of that probably probably me and that was on 90 day notes because we were doing flips okay this is back in the 80s way back okay that's super risky by the way i mean that that may be why dave ramsey is so averse to debt and we're probably about to find out but if you have a 75 ltc stake in your properties and they're 90 day notes meaning every you know meaning the longest that you have to pay that note off is 90 days so think about that if you take out a you know it sounds like he's doing flips in the 80s so you take out a hundred thousand dollar loan to flip a house you've got three months to make a hundred thousand dollars back or else they're gonna call the note that's risky okay and i was in my 20s i had grown that from nothing in just a few years and so i leveraged into every bit of it obviously but i did good buys like you have done which gave me strong equity positions and so you know i was at about about the same ltv you're sitting at roughly um and a little higher but but i had a higher risk position because of the 90 day notes and the flips which is actually what took me out there you go he said that's actually what took him out that's really really risky i mean most most commercial real estate loans are on a five to seven year basis um even hard money notes are typically four to six months depending so you know 90 days maybe he was getting better rates on the 90 days but like he said ended up being the downfall there's a way to mathematically insert risk it's called a beta and it's a statistical measure of risk the volatility of the hills and valleys if you chart it and all of that okay so all of that to say is there's actually a math formula that you can use when comparing two investments of that type because the beta is stated by the mutual fund company it's a volatility index and long story short you can adjust for risk so you can compare a high risk investment with a low risk investment apples to apples does that make sense sure okay now having said that then when i went broken real estate business i suddenly realized that in the real estate business which i grew up in we are not taught risk at all we're just taught it's all leverage and it's all good all the time that's actually really true a lot of people don't understand that there are downsides to debt you think oh i'm just getting money that i've got to pay five percent on but if you look at what happened in 2008 a lot of good notes good notes people who were actually making payments on time got called and it forced people into bankruptcy so debt is not this you know catch all save everything resource i mean it is actually risky right so dave's making a pretty good point here that i think a lot of real estate investors don't fully appreciate all the time but common sense tells you the more leverage you have the higher leverage you are meaning if you had a 90 leverage position instead of a 70 68 leverage position you would be at a higher risk agreed right but we don't adjust for that correct and if you had a a 100 paid for real estate portfolio your risk would have dissipated like light years from where you are today agreed let's assume that he's making that same 7 700 a month but had paid off his real estate portfolio so instead of running the numbers off of 7 700 divided by 1.1 million which is his current equity stake where he was getting an 8 return a cash on cash return that same 7 700 divided by three and a half million is a 2.6 cash on cash return at that point go buy bonds right invest in the stock market because if you're gonna have that much equity in there that's only making you two and a half percent on your money it's not even worth the headache of getting a call from one of your tenants that a toilet's broken it's it's just not i agreed sure yep and yet we're not taught to mathematic i mean in fact i know that it doesn't even keep up with inflation right inflation is averaged three percent every year right so you think about that when you start taking into you know inflation-adjusted returns you're breaking even maybe to mathematically adjust for that all we're taught to do is go let's take the cash flow buy more real estate must go in debt some more we do not adjust for the risk of leverage in the world that you and i are we're in i do think that's fair though we're not taught that nobody does and so we that leads us to a faulty presumption that risk isn't there and so we just go buy stuff on debt and just let's just there you always take i mean what kind of fool wouldn't have debt on real estate and we just go buy real estate and that's what i did for years and what i believe for years because i was not taught academically and no one in academics that i've ever found i've never found anyone who actually applies a risk formula to the leverage issue in real estate but it's there we know it's there from common sense all of that we actually take that into account with all of our underwriting it's tough to just say what is the risk of this but we mitigate that risk as much as we possibly can by ensuring that we've done all of the market research we know the tenants in the market that are probably going to lease from us maybe we've signed some leases on the property already you know which banks are going to want you to try and do anyway and then we fully underwrite it we say well based on historic costs and construction costs that we're getting from our contractor and you know what i think it's going to cost to buy all of the ffe and the equipment for the site you know we're going to be all in at this what are some worst case scenarios you know we're going through the salt ranch hotel redevelopment right now in that project we've stress tested it to show well if our occupancy drops 10 or if our daily rates go down by 10 15 20 what does that end up looking like on an investment return schedule that babbling to say i came to the conclusion and i've actually run some pretty sophisticated math models i developed myself because i'm a math nerd that shows that paid for real estate will prosper you a smaller portfolio of paid for real estate will prosper you more than a large portfolio of leveraged real estate over the span of 20 years okay and so high leverage guys nothing down guys all those guys that have gone broke i knew a bunch of those guys back in the day i don't know any of them made it 10 years they all crashed within 10 years like the like hot super high leverage you're not that guy okay but the you know the nothing down crowd you know what i'm talking about right yeah well i mean in in all fairness and disclosure i mean i i started it with you know 17 grand probably and then we've you know kind of just rolled up pulled the equity out bought the next one and fixed it up you know the money wisely but you know it's all going right back into the same exactly the same and and you know if you look at 7700 flow on what you got it's not that great right you don't have that much movement for the amount of money you are controlling and manipulating every day and this is also a side business i mean that's not my primary income i think how you got there i'm not going to be mad about i'm just glad you're there congratulations you've done great if i'm you i'm gonna dial down that risk for my long-term stability i would rather own less real estate that is working towards getting it paid for so i might cherry pick the portfolio and keep the ones i really want to hold 20 years and some of these others that i'm not that thrilled about i might flip the equity out of those towards debt reduction i might go the other way matter of fact i know i would all of my real estate's paid for and i pay cash for all of it and i got a bunch of it hey man thanks for the discussion i had big cash for all of it i got a bunch of it um and that's great it works for dave it doesn't work for everybody right i mean most people cannot start off and just go out and and pay cash for all these real estate investments now obviously dave didn't do that um he built out his career off of making sure people never got debt and then that has made him a lot of money but you know what i would say for this guy starting off at 17 000 and working his way up to 1.1 million in equity is unbelievably impressive so kudos to you man for getting out there and doing i think it was kyle and syracuse so good for him for getting out there and doing that my final thought i don't think that it is bad to have diversification within your portfolio right you own all of these assets in separate llcs so maybe you have a couple that you do pay off fully right so you just know forever and always those are yours no bank can ever come and take them and you set that aside just as security for yourself so you can sleep well at night but if you really want to grow a portfolio of properties aggressively you're gonna have to use leverage at some point because cash is a finite resource so there you have it for my thoughts on should you keep investing in real estate or paying off the debt on those properties obviously i'm very pro debt but i'm pro the right debt you have to use debt the right way it is a tool just like anything else it can be good for you or it can be bad for you so i know that i said i would leave a link in the description below but you can also just go ahead and click on the video here if you want to take a site tour of the salt ranch hotel that we are redeveloping and i'll see you there [Music]

Channel: Tyler Cauble

Views: 720

Keywords: dave ramsey, the dave ramsey show, real estate, budget money debt cash, insurance, how to make money, save, credit card, compound interest, buying house, buy, snowball, commercial multifamily real estate investing, commercial property, commercial real estate, commercial real estate development, commercial real estate finance, commercial real estate investing, commercial real estate investing 101, commercial real estate investing 2021, commercial real estate investing for beginners

Id: wddnUTNeiso

Length: 18min 0sec (1080 seconds)

Published: Wed Dec 01 2021