Real Estate the Ramsey Way - This Is Why You Shouldn’t Follow "Investing Bros"

Episode Date: December 23, 2024

Your home should be a blessing, not a burden—but unfortunately, some people learn that the hard way. Get the answers you need with Real Estate The Ramsey Way, and learn what to avoid and how to do real estate the right way.   Next steps: 🏠Have questions about how real estate can help you reach your financial goals? Check out our Real Estate Home Base for free tools and resources to guide your next steps.   🏠And if you’re ready to buy or sell your home, connect with a RamseyTrusted® real estate agent. They’re experts who’ll help you confidently navigate homeownership the way we teach. Listen to more from Ramsey Network 🎙️ The Ramsey Show  🧠 The Dr. John Delony Show 🍸 Smart Money Happy Hour 💡 The Rachel Cruze Show 💰 George Kamel 💼 The Ken Coleman Show 📈 EntreLeadership 💸 The Ramsey Show Highlights   Learn more about your ad choices. https://www.megaphone.fm/adchoices Ramsey Solutions Privacy Policy

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 homeownership with confidence. Daniel starts us off in this segment in Houston, Texas. Daniel, how can we help? Hey, thank you for taking our call. You bet. So the dilemma I have right now is that me and my girlfriend looking by a house within the next year,

probably starting summer 2025. And we're debating whether to go the conventional route or go the FHA route that Grant Cardone and many other real estate gurus preach. Yeah, you had me at Grant Cardone. Guru. Okay, what is causing you to want to buy a house when you don't have any money? My girlfriend's going to graduate from college around May of next year, May 2025. And depending where she gets a job, that's where we'll be looking to buy a house. house and settle down.

Okay. And what's the urgency to buy a house versus a rent until you have enough money to do this with a little bit more peace and equity? The fear of, I guess, throw money down the drain. Let me paint you a different picture of fear. You move into this house with an FHA loan, meaning you have to borrow the rest of the money because you're putting basically nothing down with these loans. That's right.

Now you have a giant mortgage that you can't afford. that's 64% of your take-home pay, and you don't have money to pay the rest of your bills. Do you see that side of the fear? I do. I do. And the problem is your risk meter gets broken when you follow these gurus out there who are saying, bro, here's how you get this house,

and you're going to rent it out, you're going to buy 10 more houses. By the time you're 30, you'll have 100 houses, and that's pretty much what they're saying out there. Am I correct? Yes, sir. Okay, so we've got to turn off those inputs because they are not there to bless us.

They want you to buy a course and go to the 10X event where you're going to 10x your mindset and all this crap, right? So that you can have a yacht too. It's important. I don't point that out. So that aside, here's my beef with the FHA loan. So this is a federal housing administration loan. It allows people who don't qualify for a conventional mortgage to still become homeowners. So you can put as little as three and a half percent down and they have more leaning credit requirements and allow a higher debt to income ratio. Here's the problem. Those borrowers are required to pay an upfront mortgage insurance premium, MIP, of 1.75% and an annual premium of anywhere from 0.15%, upwards of 0.75% for the life of the loan. The only way to remove that is to put more than 10% down, even then you still have it for 11 years.

And so there's a lot of downsides here, and most people that are trying to do these loans are simply not in a place financially to make home ownership a blessing instead of a burden. and I want you to do this the right way and another way you're going to do it the right way is with not buying a house with someone you're not married to. We have seen too many times, Daniel, on this show where people call in and say,

hey, I bought a house to my girlfriend, it didn't work out, and now it's super messy because it's like who gets to keep the house and how much equity, because I put this much down and she didn't... Do you see where this could go south? Yes, absolutely. And so number one, I would rent. I'm not going to comment on your situation,

but until you're married, I would not buy a house together. Okay. Can you promise me that for the good of the group? Okay. And number two, don't buy a house until you're debt-free with an emergency fund and a solid down payment. I'm not saying you have to have 20%, but you have to have enough that you've got some skin in the game to where you're not underwater on this house when you move in. Okay.

Now, I do follow up. What, and I'm understanding you just said not 20%, but at least enough, what is defined the sweet, spot at which point you're not you know i'm not missing out on the cost of opportunity on taking extra money investing in the sop 500 or etc of a list of other you have any debt i have about twenty thousand dollars of student debt okay how much money do you have saved 50 000 great why aren't we paying off the student loans today because let me guess the opportunity cost of investing that in the market yes sir what's the interest under student loans uh about 4.6 percent Okay, and the 50 grand is in a savings account making 4.7%?

No, it's in the market. Then you don't have 50,000 saved. You're playing with $50,000. If the market goes down 20% this year, you don't have $50,000. Okay. So that alone frightens me that you have nothing in liquid cash. So here's what I would do if I was in your shoes. This is one man's opinion, but this is the Ramsey plan that millions have followed to a path of peace

instead of a path of 10xing your mindset. Here's what you're going to do. You're going to sell enough investments to pay off the student loans. You're going to sell enough investments to give you a three to six month emergency fund, and then whatever's left becomes your home down payment fund, and you're going to move that into a high-yield savings account.

Because you told me a house is not a five-plus-year goal. It's like a one-plus-year goal, right? That's right. Let's play this out. Elections coming up. Everyone freaks out. Stock market takes a dip. Your 50 turned into 30.

temporarily, but still, you want to buy a house next year, and now you thought your down payment was going to be 50, now it's 30. That sucks, doesn't it? Yes, it does. And so I'm trying to give you a path of peace where you're moving slower, but you're actually going to get to where you want to go without falling flat on your face. So I know I sound like the old guy in the room, Daniel.

I think you're a real sharp guy. The fact that you've come this far, you've saved this much, you're investing. I love that you want to grow your wealth, but there's a few prerequisites here that I think you should knock out. Yeah. And Daniel, I'll just add this. George said it, but I just want to drive this point home. By keeping the student loan out there and just keeping it like it's a pet, and then putting all that money in the stock market, you know you've doubled your risk.

You've not removed any risk. You're not playing the smart. You've actually doubled your risk because you could lose that money, as George said. Some money, any money to me is so ridiculously risky, and you still have the student loan hanging on to you. dragging it around for years and years and years. So I would just really implore you to think through that. Because that's not what you're hearing on TikTok and Instagram. Because by the way, we're not selling you a course to tell you that.

We're telling you now. And I just think it's really important not to get wrapped up in that. You're looking at the short-term gain, and you're not looking at the long-term play. And the long-term play is you're going to be wealthy if you get rid of all the debt in your life. and you've got a house that's an appreciating asset, and there's no risk in any of those moves, none. So I hope you understand that. I really do, because I know that's countercultural is what we're saying.

I understand. I understand. All right. I'm going to send you a copy of my book, Breaking Free from Broke, Daniel. In there, I unpack credit scores, credit cards, student loans, mortgages, including the FHA loan and all of that. And then I'll show you that path that I'm talking about, and I hope that I convince you to go down that path because I don't want you calling back saying

I bought a house with my girlfriend. It was an FHA loan. We're underwater on this thing. We're breaking up. What the heck do I do? And we're probably going to take that call in the next hour. So this is not a, you know, crazy, you know, land. This is going to happen.

This is a reality that we face. And I just want more for you than that. So if anyone out there, they want to buy a home the right way, you want to make this a blessing and not a burden, go to ramsysolutions.com slash real estate. Our team has created a hub with tons of free tools, tons of free resources to help you reach your home goals, whether you're wanting to buy, you have a home, you're wanting to sell, you wanted by investment property, you want to find a great real estate agent. We have it all in one place for you, including some great calculators as well. So be sure to check that out. Ramsey Solutions.com slash real estate.

You know, it just occurs to me, because I think he was absolutely, you know, processing what we're telling. him. Don't know if he'll do it. Don't know if he agrees with us. He was processing it. But it is so not fun compared to what he presented us with. What he has heard up to this point is so much more exciting and fun and it's like, ooh, ooh, but it is not a great long term play and it is rife with risk. And yet it's being packaged as, you're an idiot if you don't do this. And that's what's really tricky about this stuff. There's a lot of ways to go about this, but we found this way actually works. No matter who you are, what your income is, but you got to get your risk meter back intact. There you go.

Alex is with us in New York. Hi, Alex. How are you? Hi. Hi, Mr. Ramsey. I've pinch washed a lot of your shows this last year. So when we decided to buy a house, we decided to do the Ramsey way and throw all of our money at it. But as the closing approaches at the end of the month, I'm getting nervous that we will basically have no money left and, quote, have all that's in the same basket. I'm wondering whether we should take a mortgage or should we just use our cash. How much is the purchase price on the house? It's 990. And how much money do you have?

I think about 1.1. Right now. Okay. So you have like $100,000 left over and you own a million-dollar house. Yeah, but like you said, a good growth fund would increase at 7 to 10% per year. And houses doesn't seem to appreciate the same rate. So like people have been telling me, especially recently, to not put all the money in the house. I don't know if that's why.

There's a lot of broke people with opinions about other people's money. So what people have been telling you, I couldn't give a crap less about. So you had decided up until people got involved to pay cash, right? Yeah. What was it that was motivating you to pay cash? Well, I mean, we actually never took how much debt for anything. Why? What was your motivation?

Why pay cash? I don't know. It's a safe interest. Okay. So we don't have to pay interest. And payments. And payments. What's your household income?

That's 350. Without a house payment and no other payments in the world, you should be able to build cash very, very quickly, shouldn't you? I hope so. Well, no, I mean, really, mathematically. It's not a hope. It's a math formula. 350 minus no payments equals a lot of money.

Right? There's still property tax. Where did the 1.1 come from? Savings. Oh, so you already know how to do this, and yet you're arguing with me. No, no, no. No, I'm telling you. You know how to save money.

You saved up 1.1 on 350, and now you're going to have no payments on your housing, which you don't have now. You're paying something on housing now. And so I'm saying it's really easy to stack cash, and you're going, I don't know. Well, yes, you do. You saved up 1.1. You already know how to do this.

And it's going to be even easier without a house payment. Alex, I'm going to tell you what I think's happened here. I think your values led you the right direction. Your values have driven you to an unbelievable position of having 1.1 cash for a home. And you ran into somebody who has some influence in your life and they're starting to mess with your head. But your values and your gut were right on the whole time. And now influences are messing with you. Isn't that what's happening?

Maybe I think so. I'm here to tell you that's exactly what's happened. Also, it's a very huge purchase that makes me... Yeah, but remember, you just told Dave the reason you didn't want to have a mortgage is because of the payments. If you put a mortgage on, it's still a huge purchase. That's true. And as a matter of fact, it's two huge purchases, a mortgage and a house. Yeah. Yeah.

So, listen, either don't buy the house and walk away from the deal or pay cash. If I were in your shoes, sir, that's what I would do. And you are going to have millions and millions of dollars as a result of that advice if you listen to me. Because without a house payment, with a house payment or with rent, you've already saved up with your income 1.1. You're already an stellar saver. And so you're going to rebuild this so. You have another million dollars in cash laying around so fast. So fast.

Let me just please do it. Please do it. Wow. It's interesting. I guess when you walk out the first time and you have to step on something that you've never stepped on before, you have to step into something you've never been before. That's right. It's naturally, it's the first time he bought a million dollar property. That's a lot. Yeah.

And his friends played into, they weren't trying to manipulate, but they played into that fear by giving him an option. And now you can kind of rationalize the fear. No, they didn't give him an option. They shamed him. Might have been, yeah. Yeah, like, what kind of idiot are you getting a mortgage, man? Nobody does that. Nobody pays cash.

What are you listening to some hillbilly in Tennessee? Come on, man. And that allows him to rationalize the fear. Then you go, I don't know. Now I'm suddenly unsure. I'm the guy with $1.1 million in cash and I'm unsure. Come on, Alex. You got this, man.

You got it. You can do it.