Real Estate the Ramsey Way - Is Homeownership Still Possible When Prices Are This High?

Episode Date: May 12, 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. Michael's in Madison, Wisconsin. Hey, Michael, welcome to The Ramsey Show. Hello, Dave. Hello, Rachel. I have, well, I'm a father of two kids, wife is a stay-at-home mom, and we're currently living in an apartment. and I'm trying to figure out how to possibly afford a house. And I looked at your website and you said 25% of your income, your take-home pay, which means in our area about 90,000, which is non-existent. So I just wanted your input with that. Okay.

So what do you make? 90,000 before taxes. It's about 4,200 a month take-home. There's something wrong. 90,000 is a long way from 4,200. $4,200, it's $50,000. You don't have $40,000 coming out of your check a year. I've been putting in 8% of my paycheck into retirement.

The take-home pay we're talking about is take-home pay after taxes, not after your health insurance and not after your 401k, and not after your car payment that goes to your credit union and all that. No, this is actual after-tax income, which in your case would not be, 90, but it would not be 50 either. It would probably be about 75, something like that. It would be your 75 to 80. 75 probably would be your take-home pay. Yeah, so the 90,000 is what my work says I'm getting pre-taxes. I know. And so your after-tax income would be about 75. Thousand a year.

Got it. Okay, which is considerable more than $4,200 a month. Okay. So that was one misunderstanding. The other thing is this, okay, you live in Madison, Wisconsin, which, as you know, is probably the most expensive city in the state. Yep. Yep. It's a beautiful city. And a lot of picturesque things there, a lot of character. But it's very expensive.

And so, now the urban growth theory that I learned when I was in college getting a real estate degree says this, that not counting math, mountains and water, if you drop a pebble in the middle of the downtown district and rings go out like on a pond, the further out on the rings you go, the cheaper the real estate gets. In other words, the further out in the country you go, the cheaper it gets, right? Sure. Now, again, the exception would be if you land on a beach, all of a sudden it shoots up, or if you land on a lake, it'll shoot up, or if you land on a mountain, it'll shoot up. But other than that, generally speaking, and none of those things should be a beach.

problem at Madison. It might be a lake problem, but that would be it. But I mean, you generally can go 30 more minutes out of town and the prices go way down, agreed? I've been looking and I've already drive 30 miles one way and the home prices are still around 350,000. A lot of people commute into Madison. Yeah. It's a tough market to live in. Yeah, I don't argue that. The thing is this, just because you live in a tough market or an expensive market doesn't give you a pass on math math still going to kick your butt and so you've got to make decisions that are good for your family long term and not rationalize because i've taken this exact call from people from california for i don't know 30 years davy your your stuff doesn't work in california and i went

no your stuff doesn't work in california that's the difference i mean you can't some people can't afford to live in New York City. So you guys have made a decision for your wife to be at home with the kids. Good decision. I love the decision, but it brings your household income down, obviously. And you're making a good income, but you're not making serious double-triple the national average or something, and you're in an expensive area. So you also can't afford to live in Tokyo, London, or New York City in Manhattan because you don't make enough. and so those are expensive real estate markets, a lot more than Madison even. So the county that Rachel and I live in is the 11th wealthiest county in the nation.

Not everybody can afford to live in Williamson County, Tennessee. It's freaking nuts. And the cost of living, the cost of housing here is just bizarre. So if you, you know, it's one of those things that you cannot leave Nashville, you've got to go past this county for it to start to go down. And you go to counties south of here. You can get cheaper housing. But then you're looking at an hour drive into Nashville or an hour and 10.

Yeah. And so that's the kind of stuff you have to do if you want to do it today. Or you can wait a while and let your income come up. Yeah. And while you save for a good down payment and it's just going to be a few more years. And too, you know, it doesn't even have to be a single family home. Like we know a lot of people, townhomes are great if there's a newer development, you know, and they're doing townhomes.

Like, there's other options. Georgia and Whitney's first purchase was a townhome. Yes, it was. They sold it and bought the next house and made a lot of money on it. Yeah, yeah. So there's ways to kind of stare at, but it does take a lot of patience. And it is frustrating, Michael. I mean, like, I hear you.

And we have felt that especially in the last probably three years or so when the housing market has boomed in that bubble wasn't really a bubble. It stayed. You know, the housing prices did never really did come back down. So it is. They're not going to. It is, yeah, and it is tough. but it just means more patience and the fact that like your expectations are going to have to shift because that's just the reality of the market.

Yeah, exactly. You're going to make a decision at some point somewhere to get your foot, your toe in the door, your foot in the door, somewhere you're going to make a decision to do that. And that may be a, it may be a fixer-upper, it may be a townhouse, it may be moving even further out yet, and those kinds of things get you started in the housing market. but I'm not going to ever tell you to do something that brings you harm, and buying a home you can't afford will bring you harm. It is not a blessing.

And so all real estate purchases are not good. All real estate is good and does go up, but not all purchases are good because they don't fit in your life. They don't fit in your numbers. And if you squeeze your whole house down to nothing and your wife has to go back to work because you bought a house you couldn't afford and that you didn't want to do that, then you've traded your values for this purchase because you're you, you rationalize the purchase of the house.

So, well, it's too expensive here. I can't do it. And I don't want that for you. I want good things for you. I want blessings for you. I want 10 years from now. You'd be glad you follow the stuff we teach. And 100% of the time, this works. So good question. Let's go to Ricky. He's in Atlanta, Georgia. ATL, Shoddy. What's going on, Ricky?

Hello, how are you doing? Doing good. I have an investment property that I own this swarf of about 700,000. and I'm trying to decide I have two offers one offer it's 600,000 at 6% for 25 years oner finance with with 15% down and one offer is a cash offer for 700,000 and or should I keep the property and I'm 62 and I'm getting ready to retire and I have some money in my 401k but I've worked with some financial people and it seems like if I take this property and pay the depreciation and the capital gains and put the money into an IRA, I will leave more money

for my kids in 25 years than if I hold on to the property. With the value of it and everything. What would cause you to consider the other offer over a $700,000 cash offer for the amount that it's actually worth? Because I've been told in the past that it would spread out the depreciation of capital gains and I wouldn't have to pay the taxes. One year, I could spread it out over the length of the loan. What was the rental bringing in in monthly rent?

It brings in about $9,400 a month. Okay. And you're just kind of tired of it. You're like, oh, I don't want to deal with it. I'd rather sell. I've been doing it for 20 years. Yeah. And at one time I had two partners in 66 properties.

We had split up, and I'm down to 13 properties. Oh, wow. That's great. Yeah. I mean, I would, I like diversification in general. So the fact that you have other properties is great because you're still in that, you know, a little bit of real estate, you know, in your entire portfolio. But if you have a cash offer like this, I mean, I would be, yes, I would be tempted to take it.

I just know how much work it is to keep up with properties. And you've kind of played the long game because really when it comes to making money in real estate, it really is what you've done, where you bought. I mean, how many years ago? You've had it for how long? I've had it for 20 years. And, of course, we paid 400,000 for it. It really made no money on it until now.

Yeah. Yeah. So all of the money went to the mortgage. Sure. Yeah. So now that it's paid off and now you have so much equity in it, that's like the payday of rental, right? Where you get to do this and sell it.

And, yeah, put money in IRA, live off the interest. and, you know, I think that's probably what I would do. I think it simplifies everything. And since you're a real estate guy, you still have other properties. Are those other ones paid for? Yes, they are. They are. I'll keep five rental units that are completely paid for. Okay, Ricky. So how much are you worth? I'm just curious. How much are all these properties combined? With my private real estate, it's about $2 million. Wow. That's great. Very good. All paid for. Yes, all paid for. Well done, Ricky. Well done. That's really good. cool. Yeah, I mean, I think either way, you're going to be fine. So, but yeah, I like the idea. We just met with our financial planner this week. And like last year, what the market did was insane.

Yeah. It was like in the like 24. I mean, it was just crazy. You know, 22 wasn't a great year, but 23, 24 were great years. So it is kind of fun to see the math game in the market just knowing, okay, you had a piece of property, which is ideal, right? When you make money in real estate, you're kind of making it at the buy. So you buy it, hopefully cheap. And, you know, and, you're, And then as it appreciates and you gain equity, then you get to sell it. And that's where you're making the money. And so that's, I mean, it's literally what he's done. And then go put it in the market and hopefully knock on wood.

I know it won't all be that as good of a year as we've had the last two years. But it's just been incredible. It's really the same game with putting it in the stock market as it was with real estate. It's the same idea of keeping that investment over time. And over time, like you said, you might not have a year like 23, 24, but you could and you should see at least. a 10% return over that scope of time. And so that's what we're talking about when we say that. So I think it's great. Great, Ricky.