Is it Better to use Cash or Loans When Investing in Real Estate?

There is a lot of talk about how evil debt is and why everyone's goal should be to be debt free. I am not one of those people! I have used debt and a lot of it to make a lot of money in real estate. I think there are ways to get yourself in trouble with debt, but if you use debt wisely you can be fairly safe and make much more money it than just paying cash.

Why does Dave Ramsey think all debt is bad?

Dave Ramsey is probably the most popular person to talk about how bad debt is. He says that you should never buy anything that you can not afford to buy with cash. I think Dave Ramsey can be very helpful for people who have tons of debt, and cannot control their spending. However, I do not think his ideas work well for those who want to maximize their profits and investment dollars. Dave also says that it is not wise to invest in real estate stating that he went bankrupt from real estate.

What Dave Ramsey does not tell people is how he went bankrupt in real estate. It was not from rentals, or flips, or buying too expensive of a house. He was investing in an extremely risky manner. He would buy run down commercial properties that made no money on their own, but could make money thanks to a tax loophole. The government shut that loophole down and Dave was left with a bunch of commercial real estate that was almost worthless. Do not think real estate is a bad investment because Dave Ramsey says so. He was investing in a way that is not even possible today. It was also one of the riskiest things anyone could invest in at that time.

Debt can absolutely be an amazing tool for real estate if used wisely. Dave likes to sell his debt free educational programs so it makes sense he tries to sell people on all debt being bad.

https://investfourmore.com/2017/02/01/podcast-86-how-to-use-debt-to-make-more-money/

Is there good and bad debt?

People also say there is good debt and bad debt. Good debt is on something that makes you money like a rental property. Bad debt is something that does not make money like a car. I do not agree with this concept either. I don't think it matters what the debt is against. I think it matters the terms of the debt and what the money is used for. I have a loan against my Lamborghini. I could have paid cash, but the loan was 12 years long at 5 percent interest. I can make much more money using that cash to buy houses than the 5 percent interest rate costs me. I am also financing the Aston Martin I am taking possession of next week.

https://investfourmore.com/2014/12/24/good-versus-bad-debt-investing-real-estate/

How can debt make you more money with real estate?

I make much more money flipping houses when I use loans than if I just paid cash. For example if I bought my flips with cash I would need:

-$150,000 to buy the house
-$40,000 to fix up the house
-$5,000 for carrying costs
-$5,000 for other expenses or overtures
-$200,000 total is needed and that money may be tied up for 6 months.

I would be able to flip may be three to five houses at once with that model. I would make about $35,000 on each house, which would be $210,000 to $350,000 a year flipping.

If I get a loan I can finance most of the cost of the flips, but would pay $5,000 to $7,000 more in financing costs. I would have about $50,000 of cash into each deal instead of $200,000. That means I could flip at least 3 times as many houses. I would only make $30,000 per deal, but could flip 12 to 20 houses at once. In fact, I have 18 flips going right now.

I make three times as much money, even after paying financing costs, because I can do so many more deals at once.

https://investfourmore.com/2015/06/12/should-you-use-cash-or-financing-when-flipping-houses/

The same thing can be said for rental properties. The returns go up and you can buy many more properties with loans. There are huge advantages to having more rentals:

-You can buy more houses below market value.
-You get more tax advantages with each rental.
-You should get more total cash flow.
-You get more appreciation.
-You pay down loans every month.
-You have more diversification, which is safer.

Here is an article with more information on the advantages of using loans with rentals. https://investfourmore.com/2013/08/28/should-you-pay-cash-for-a-rental-property/

Debt can absolutely be a great tool to make more money with real estate

If you think debt is bad, most of the largest companies in the world use debt to increase the returns of their shareholders. Remember that to use debt safely you should have cash reserves incase something does not go as planned.