Real Estate the Ramsey Way - Dave’s Guide to Flipping Houses

Episode Date: January 6, 2025

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Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate home ownership with confidence. Tara is with us in Louisville, Kentucky. Hi, Tara. Welcome to The Ramsey Show. Are you ready for the question? We'll try. Okay. We're looking for advice on what we can do for financing for flipping houses. We currently used our home equity line of credit for the purchasing and remodeling, but of course that payment gets a little high.

So we're just looking for some ideas of what to do. Okay. I've probably done 1,500 or 2,000 flips in my life. That's what I used to do for a living before I went broke because I borrowed money doing flips. So for 35 years, I've taught people not to borrow money as a primary way to lower risk and create wealth. I don't borrow money, and so I'm not going to be able to help you borrow money.

Okay. Then what do you, I mean, do you just straight out advise just cash for flipping a house? Yes. Okay. And here's, there's a lot of reasons why, okay. when you use financing to purchase a house that you're going to flip, you're not as careful as when you use money out of your bank account to purchase a house to flip. When you are using financing to do the renovation on the flip,

you're not as careful as when you're pulling your stinking hard-earned money out of your checking account to do the renovation, and you end up spending more on the purchase, more on the renovation, thus your margins are lower. Oh, and then when you get ready to sell it, and interest rates tick up from three to seven, and the market slows down dramatically, and you're sitting on this thing with payments, you become what's called a motivated seller, and you give up the rest of your margin. So your margins are destroyed when you do flips for those three reasons. with financing. So I would go a lot slower, buy a lot smaller, buy something seriously junky and

tiny, and flip it with cash out of your pocket. Use every bit of the profits from that to do that, to upgrade your flip to the next one, upgrade your flip to the next one and upgrade your organically grow your cash base with profits to increase the quality of the flip that you're doing. Because what you are doing causes more people to go broke, then it prospers more people, including me. Okay. So I'm really scared for you because the thing that has to go through your mind when you're doing these deals is that this is all going to work, and it never in real estate, I've done

thousands of transactions. It never works exactly the way you thought it was going to. Yep, that's exactly right. And, you know, Tara, my husband, just even this last year, he's kind of started And he's done three flips. Yeah. And, you know, and we've cash flowed it. And you're right.

And he's good at real estate. And he does it. So I can't take any credit. But yeah, there's like, you know, it's a state sale. There's dead rats in the house. I mean, they're not pretty properties. But then when you go and what you're saying, you make the selections and it's us making the selections out of our own account, you are like, okay, what can we do here, here,

to save money here? I mean, you were thinking through everything. We brought the kids out to do the yard work last weekend over East. to help move some stuff before they went through and like tore out the bushes. And, you know, I mean, you just think about it different. It's just, and it's a slower process. It's not as fun and flashy. But there's, there's so much less risk.

And if something were to happen, you're okay. You're okay because you don't owe a bank something. You know, like it just goes back to the options like we talked about the last hour. I mean, let's pretend there was a Fauci pandemic or something like that. And the market just froze like a deer in the headlights and nobody's leaving their home. And they're cuddled up in the corner with their mask. Well, and what happened with you? was that you had so many of those going, and you were good at it.

Yeah. And because of that, you kept building on it and making a bigger, bigger risk. And then when... I had a million seven in finance flips at 24 years old. I owed the bank a million seven on flips. Which, remind everybody, because that was... That was 1984. Decades ago, because it's a million seven now for some people.

It's like... So it would be $8 million now. Okay. Yeah. So I had the equivalent of $8 million financed in today's dollars under flips at 24 years old in 1984. There's a 1 million, $1 million with one bank. And this is how I learned not to borrow money. Yeah. And I had 30% equity positions in almost every one of them. I was not laid on a single note. So what happened, Dave? What happened to your little house of cards? The bank got sold. Small town bank doing business with me.

They knew I knew what I was doing. My family had been in the real estate business. I've got a history, family history of knowing what we're doing. All of a sudden, some bozo in Atlanta instead of Nashville, is making a decision. And he looked down and said, a 24-year-old owes us a million three. Have we lost our minds as a bank? Answer, yes. And they called our notes, which they have the right to do with commercial paper.

It has a call provision in it if they don't like the quality of collateral. And they suddenly just declared that they didn't like the quality of their collateral anymore. And now I've got to come up with a million three and I'm 24 years old. It's all tied up in real estate and I probably got $30,000 in cash because I was a freaking genius and had it all figured out. Now, there's your TikTok deal right there. You TikTok morons wanting to flip houses. So there you go. And so that's exactly.

what's happening. Now, that, and I spent the next three and a half, two and a half three years of my life losing everything I own. And so the year Rachel was born, we end up filing bankruptcy at the bottom of it, lost every stinking thing. One year I made $250,000. That's $20,000 a month in 1984. The next year my taxable income was $6,000. I spent the whole year selling stuff to avoid foreclosure or being foreclosed on on the way down into bankruptcy. So, yeah, trauma. I'm a trauma survivor. So that's it. And so Dave don't borrow money.

When the borrower is slave to the lenders in the Bible, I think God's smart. I think God knows something. I don't know. And I don't borrow money anymore. So all that to say, Tara, I... Call the wrong guy. No, but no, you know... On the right guy.

Whoever told you to call over here, I think they set you up. But the... But yeah, I want you to go do flips. I mean, my son-in-law does him. My daughter's husband sitting right here. And I taught him how. You know, I taught him a lot. How to go get foreclosures.

Not everything. I taught him how to buy foreclosures and buy real estate. Yeah. He worked running our Ramsey portfolio for a lot of years and still runs it. But he's, and he's using the formulas right now that we talked about back in those days. And he's paying cash. So I'm not against flips, but do it with cash. And you make way better decisions all the way across the board.

And you don't turn yourself into a motivated seller. And you won't hear any of that on TikTok, I can tell you. Let's go out to New York, New York, and talk to Jorge. Hey, George, what's up, man? Hey, guys, what's happening? Man, we are making it rain out here literally. It's the horror. It's the summer of George around here.

What's up? All right, so a little bit of a backstory. I called in about three years ago, and Dave put me on the right track. We just paid off all of our debt except we do owe $38,000. on our home. You're close. Congrats, brother. All right.

So here's where it gets interesting. So where we currently live, it's, you know, very congestive area. We each drive about an hour to work every day. Sometimes that can meet. It could be two hours, really depending on the traffic and what's going on. We really don't make the area that much anymore. We've been there 24 years. We found a house out in the woods.

So basically a brand new construction home. And what we want to find out is it a good, is it an okay financial move to buy this new home? Can you afford it? I feel like I can. What's your current houseworth? We're figuring out the 25% rule. We feel like we're way under that.

Oh, okay. So what would your commute become once you move? 30 minutes. I like that. So what are the downsides here? I guess the downside. would be is, of course, like I said, we're almost, you know, our house is almost paid off. And we'd probably be taking on about a $100,000 mortgage by the time, you know, we met after

closing costs and all that sort of time. You'd be taking a mortgage of $100 grand? Yeah, it's probably what we're looking at. I would do this tomorrow. And how quickly will that get paid off with your income? Well, we're going to do a 15 year, but I feel like we could probably pay that off in five or six. What's your income, household? We're making $1.50 a year combined.

Okay, could you throw upwards of $50,000 a year toward the mortgage and live off the $100? I don't see why not. Well, then it's gone in two years. You'd be dead free in two years. That's basic math. We need to do rice for three years, so. So there you go. Just set a goal.

It doesn't need to be crazy, but set a goal and say, in two years, this new mortgage is going to be paid off. And instead of one year from now would be debt-free. If we move, it'll be two. whoopty-do and you get your life back i would do this and george i'm i'm becoming more and more um i don't know if it's bullish or bearish i'm becoming more careful about how i can buy back time and you and your wife will be buying back an hour hundreds of hours a year one way every day right and over the course of a week you're buying back five hours so ask yourself what would it what would we charge, what would we pay for half a day together every week?

That turns into you just bought a full day of time together, not including sleeping time, but we bought 10 hours every two weeks, just in commute time. Gotcha. I mean, I would do this tomorrow. Well, here's the strawberry on the top. So the house that we're selling probably can use about $90,000 of work, but we can currently sell it at $300, as is no price. problem tomorrow. This will be a new construction home, brand new house. Sell it tomorrow.

Call the realtor today. Go to Ramsey Solutions.com slash agent. Slash agent. Get yourself a smart investor pro. I'm sorry, a real estate pro and get that thing on the market in the morning. Awesome. Congratulations, man. You're going to, you're going to have to get a chicken coop. You're going to have to get overalls, a straw hat, the whole thing. That's a bunker. Could be cool. Yes. You have to get a bunch of deep freezers and ask people if they've heard about meat prices. You're going to be the hole out. Like, you're going to be one of my neighbors. Now, I can't wait, dude. Congratulations. Hey, you've done it right and you worked really, really hard for this moment. For this moment when you and your wife say, hey, let's buy back some time.

Let's buy back a different kind of life. We're on it.