4/25/2005
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover
"New car and debt – what do I do first?"
Dear Dave,
I am a full-time real estate investor. My wife and I are using your principals
to get our finances in order. However, after she heard how you went bankrupt
doing real estate investing, she’s become very fearful that we may suffer the
same fate. She gone completely gang-busters about me paying off all of the
properties that I have to the extent that she even wants me to sell some of them
to get rid of all of the debt. It is part of my plan to pay off all of these
properties, but not the way she’s insisting. I’ve tried to explain to her that I
think our situations are different. You had a lot of short-term and balloon
notes. I’ve got long-term and fixed notes with really good interest rates.
Do you have some advice to help us work this out?
Al in Pittsburgh, PA
Dear Al,
I think you’re both right. You are correct that what crashed us was that we had
90-day notes. The bank freaked out on those 90-day notes and called them due. We
did have some long-term notes on our rental properties and those eventually went
down as well, when everything imploded. So, you’re assumption that your
situation is more stable than ours is correct. For my story to cause her
terrible fear and sleepless nights wouldn’t be good.
Having said that, I will challenge you though. Real estate investors, including
me, have been taught early on to borrow money. However, I’ve talked to investors
in cities all over this country who have substantial holdings in real estate
and, by and large, they have moved away from using and being in debt. Some of
them never used debt, but some used it early on and learned to stay away. The
Carlton Sheets model of real estate investing breaks people and destroys them
financially every year. They pay too much for the properties and can’t get them
to create a positive cash flow. Real estate people are notorious for
misunderstanding cash flow. They think if the property rents for more than the
payment amount due, it has positive cash flow – and those of us experienced in
real estate investing know that’s not true. There are vacancies, advertising
costs, lawyer’s fees, eviction costs and a bunch of other expenses that affect
your net cash flow.
Your wife is also right in that the borrower is slave to the lender. Delve more
deeply into the information she’s learning about the risks of debt. Consider
adjusting your paradigm and moving, at least somewhat, in the direction she
wants you to take. You don’t have to sell half of your property holdings today
to get debt-free, but develop a three to five year game plan to get completely
out of debt. Then you can purchase and hold real estate with cash. You’ll put
yourself in such a strong position, as a real estate investor, if you’re working
with cash – which is something most real estate investors never have. Then,
you’re always in a position to be a buyer and ready to move on those great deals
without having to wait on some banker.
So, you’re both correct. She needs to challenge you a bit more, but she can also
calm down a little bit and let you work out your game plan. You’re obviously a
bright guy who can develop a strategy to reasonably become debt-free.
-Dave
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