There Is A Very Wrong Way to Invest in Real Estate

Today, we’re looking at the first 3 paragraphs in Chapter 1 of Dave Ramsey’s Complete Guide to Money. And here’s my lesson for the day:

Debt + Real Estate is a dangerous combination.

Chapter 1, titled Super Saving: Common Sense for Your Dollars and Cents, starts out with Dave telling a story of how he lost almost everything as a real estate investor in his twenties. He told a pretty dramatic story of how he shed tears of regret, wondering how he wound up in such a huge financial mess.

Next, he goes on to give more details. He had built up a huge portfolio of real estate properties in a few years while still in his early twenties. He was flourishing, and he was on top of the world. Or not.

Dave and his family had everything going great for them until it all came crashing down. Gradually and suddenly, a big portfolio of home investments… turned into a big mountain of debt… turned into a constant source of stress and worries… which then turned into a tsunami that almost wiped him out.

According to Dave: “I had played the money game, and I had lost.”

And now the big question: Could all of this have been avoided?

And my answer to that is: YES.

How?

By understanding that: Debt + Real Estate is a (very) dangerous combination.

According to Gallup, more Americans (35%) continue to hold real estate investment as a better long-term investment than stocks, savings accounts, or gold.

And I’m sure you’ve come across a number of reasons why real estate is a ‘golden’ investment.

For example, you get:

  • Consistent, predictable rental income and steady cash flow
  • Lower interest rates, which makes home buying more affordable
  • Tax benefits, as you can deduct certain costs related to owning, operating, and managing a property

Also, Mark Twain once said: “Buy land. They’re not making it anymore.”

Even more:

  • You can buy low and sell high, as real estate values tend to increase over time
  • You can build wealth and bump up your net worth, as you pay down your mortgage
  • You often get lower tax rates on real estate properties
  • It’s relatively easier to use debt to invest in real estate properties

Which are all excellent reasons to want to own a home and jump into real estate investing.

But caution, caution, caution!!

The most risky out of all of those benefits I just mentioned is the last one.

Which one? This:

It’s relatively easier to use debt to invest in real estate properties.

Before I explain why that’s the most risky of all the benefits, let’s look at why it’s relatively easier to get debt that you can use to finance your real estate investing.

Because: Real estate is a physical asset and you can easily use it as a collateral. Therefore, financing is always available for you to use.

For example, a 25% down payment on a mortgage can get you 100% of the house you want to buy. So that way, you’re using the debt to increase the potential return on investment from your house.

But with this ease comes a very big risk.

Here’s why it’s risky:

Using debt to pay for your real estate investment is a big gamble and a risky game to play. And because it’s a risky game to play, you need lots of discipline to play without losing your shirt.

Because: You can claim to have $x million in real estate portfolio, but if it’s all serviced with debt, you truly don’t own that much in your portfolio. Which means, you’re always at the mercy of the banks or whoever loaned you the money.

If the banks are not collecting, you’re constantly exposed to the risks of:

  • Renters not paying on time
  • Property with no one willing to rent it
  • Extra costs of maintenance; and replacing and fixing stuff in the property

Which means: the real worth of the portfolio is not $x million, but a lot, a lot less than that.

And what does this all mean:

Well, it means: if, for some reason, you still want to go ahead and use debt to invest in real estate, you’ll need to be ready to sacrifice other luxuries of life, so you can protect yourself and your investments.

That is, no fancy clothes, expensive cars, plush vacations, buying boats, and so forth.

If you’re using debt to invest in real estate, actively find several ways to cut back on expenses (big and small) and the leisures of life that you currently enjoy.

By doing that, you’re not just protecting your properties, but you’re also saving yourself from a future of financial regrets and disasters.

So stated another way:

Debt + Real Estate + Expensive lifestyle = Moving dangerously close to financial regrets and disasters.

Such a valuable lesson to always remember.

That’s all for today, my friend. We’ll be continuing in the 4th paragraph on Page 5 of the book tomorrow.

See you then.

-DD

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