Dave Ramsey guideline for buying real estate?

[caedmyn]

We are not exactly following Dave Ramsey but I would like to.  We are hoping to be debt free by the end of the year.  We'd like to purchase a rental property for semi-retirement income (to hopefully have it paid off in 15 years or less).  I know Dave Ramsey advocates not going into debt for anything, but does he say anything about going into debt for something like this?  I don't see any way we could ever save enough to purchase a property without a mortgage, we just don't make much money and I doubt that is going to change.  I don't see how we can even save enough for a 20% down payment and not have to take out a loan on our home (at least without saving for 10 years to do it), but maybe that would be possible.

FWIW DH has managed several rental properties for a friend for the last couple of years so he is very familiar with the work involved, how to find good tenants, etc, and he's a handyman by trade so capable of doing most repairs himself.

[mich]

I like Dave Ramsey but this is where he lost me. We have many rental buildings , mostly 3 family buildings. The formula we have used is 2 units cover all expenses and the 3rd rent is profit. Following this we can see how much we can pay for a certain property. All our buildings have mortages on them, some 15yr, some 30yr, all fixed rate. The income from these buildings are what allowed me to be a SAHM.

Our own family home has a small mortgage we are working to pay off early, and we have 1 rental that was a 15 year that will be paid off soon. But the rest just have debt and it does not bother me. After 15+ years as a landlord, I would recommend it. It has worked very well for us. Buy at the right price, location-location-location, screen tenants well(very important), and be your own handyman.
Edited by mich - 5/23/11 at 9:11am

[Caneel]

I used to be in the real estate appraisal business and then in banking.  I agree with Mich's advice.

A general rule of thumb in the appraisal business was, at market rent, a property should net 30% after expenses, maint, reserves for replacement as well as an allowance for vacancy.  Nearly every unit will sit empty at one time or another.  The key is understanding what reasonable market rent is for your market and having a realistic expectation for expenses.  (This is right in line with Mich's 2 to pay the bills, one for profit theory)

When I was in banking, we would not do a loan for a rental property if the cash flow didn't cover all the expenses and the mortgage by 125%.

The biggest mistakes I saw people make when buying "investment properties":

Not having a down payment.  If you can't save for a down payment, you probably can't afford to deal with unexpected expenses that will arise with property maintenance.  (I have seen people who were super motivated to pay down their mortgage and could use that equity but that is a different situation**** see below.)  Further, no downpayment means higher mortgage payments = less profit/cash flow.

Thinking they will never have vacant units or that people won't pay.  It can and will happen. 

Overestimating their own handy-man abilities.  (OP - sounds like your DH has the experience in this area.)

Buying or listening to any one of those late night infommercials on how real estate investing will make them rich.  I would get one disciples about once a week in my office.

***OP - if you have the equity in your home that you can borrow against, there is your downpayment.  Just factor in the cost of that risk and interest.

[moneymama]

Great advice.  I like Dave Ramsey, but am also a landlord with several mortgaged properties.  Here's a middle ground idea.  Dave advocates having a 6 month emergency fund to cover your expenses.  How about buying a property ONLY when you have a 6-month emergency fund FOR THE PROPERTY (this, of course, is after you have one for yourself).  That way, you have a safety net if something breaks or have unexpected vacancy.  I would not enter into rental property without a significant cash safety net.

[heatherdeg]

I really can't add anything more to the great advice here and echo that this is where Dave and I part ways because he's not exactly "for" a mortgage for ANYthing--not even income properties.  I understand where he's coming from (based on his personal experience with owning rental properties) but I don't agree that his experience should make everyone else live completely risk-free.  The trick (or rather, the learned skill) is to balance the risk--and you have some awesome advice in this thread.  The only other thing I could add is that we try to bank the first 6-12mo of profit on a property as the property's own emergency fund.

And I would say the middle ground (for me) would to be having a 12-mo emergency fund going into the first transaction.  Your dh sounds way more qualified than most people that get into landlording, for sure, but stuff still happens.  I'm probably a bit more risk-averse than most so take it FWIW.     Otherwise, now's certainly the time to buy.  

[gbradfordsmith]

Sounds like you have a SUPERSTUD for a husband.  Have you hugged him today???