Investing in Real Estate - A Nerd Post - Me vs. Dave Ramsey

[Greebo]

One area where I have disagreed with Dave in the past is in the area of investing in Real Estate.

Dave, of course, is a 100% cash guy.

I, on the other hand, have considered it an acceptable risk to save up 20-25% to buy an investment property, financing the remaining 75-80%. My reasoning for this is while the net income from a financed property is certainly lower, my thinking was that the income increases overall more quickly than with the cash method. I even ran some comparisons in the past to determine at what point I would replace my current income with rental income using either method. AND - I was right - based on an *emergency expense* budget of $3,600/month, financing properties *would* bring my rental income up to the required level faster than saving up to pay cash.

Lately, however, I have been wondering if I messed up the projections (I couldn't really remember the specifics and I didn't save them) - and additionally, our financial situation has changed since the last forecast. For example, in the "finance them all" method, the risk involved increases as the # of financed properties increases - and while in both scenarios, every missed rent check reduces the income, in the first scenario, every missed rent check does far worse - it means I have to carry that mortgage to some degree.

So today, because I had a little time to kill, I decided to do new forecasts with a more detailed, long term comparison of how my real estate investments will do if I finance them all, vs. pay the current financed one off and then pay cash for the rest.

Here is the setup info:

Home payoff excluded - my rentals are a business and I run them as such. Our take home pay from work pays our mortgage and BS6 extra.

Baby step 4 - 50% of 15% of my gross income is invested in my rental business - this amounts to $349.02 every 2 weeks.

In method one, I used an estimated income of $300/month (rental profit) plus my investment money. I paid nothing extra to the rental mortgage. I took $300/month plus $349.02 every 2 weeks and saved it up. When I hit $36,000 or more, I zeroed the savings and increased the monthly income by $300 - which represented buying an identical new property and increasing the cash flow by the same as my current property.

In method two, I used the extra income of $300/month plus the invested money and paid down the mortgage, saving nothing (I do keep a 6 month business buffer but that's outside this equation). Once the rental was paid off, the mortgage goes away, increasing the income from the property to $1,200 a month. I took that plus the $349.02 and saved it up - until I hit $115,000 or more - then I zeroed the savings and increased the monthly income by $1,200 - again representing buying an identical new property and increasing the cash flow in the same manner.

Using method one, I saved up enough to finance my 2nd property by 12/31/2012. The 3rd property came in March of 2015, and the fourth in Jan of 2017. This continued for some time, and by October of 2025, I had the income of $3,600/month.

Meanwhile, in method 2, I didn't save up anything for a new purchase, but I did pay off the rental's current mortgage in October, 2016. At that point, the income became $1,200 and with the biweekly retirement investment, the money buildup to buy a new one happened pretty fast. 5 years later, in 2021, I had $115,000 and "bought" property #2. Way slower than method 1 - but my income was now $2,400/month while on method one, the income at 2 properties was only $600/month (albeit, 9 years earlier).

But when, you ask, did method 2 get to $3,600 a month? In October of 2024 - a full YEAR before method 1 got there.

Now - you may say - But Greebo - you were banking money every month in method 1, way before you started banking it in method 2. Yes, I was - and I kept a running total for both methods that was net profit from the rentals PLUS the retirement money I invested. On the day the financing method hit $3,600 a month, the cumulative income via that method was $334,027.81 while the cash method on the SAME day only made $261,588.13.

But jump ahead a year and a bit, to February of 2027. Cash has just bought it's 4th property - it's income is now $4,800/month. Financing HAD passed cash on income - with an income of $3,900 a month - but now it's behind again - and while it will catch up one more time, in June, 2028 - Cash will jump to $6,000 a month in November, 2028 - and financing will never, ever catch up again.

You see where this is heading. Financing does, in August of 2030 - 20 years from now - eventually get to $6,000 a month net income - there I own 20 properties, and all 20 of them have mortgages - including an outstanding balance of $52,000 on my very first one. Grand total, Financing has pulled in $641,000 - although this is actually high because while I have deducted interest from this total every month for the first mortgage, I have NOT done so for the other 19.

Cash, on the other hand, at the same time - now has an income of $7,200 a month from a paltry 6 properties. There is *NO* mortgage debt, no interest to pay, and the cumulative earnings for cash is $594,764. Cash is catching up even without the extra interest I didn't factor in.

In May of 2032, cash cumulatively passes financing - $782,768 to $781,272. Financing never catches up again. I've got 7 properties via cash vs. 23 via financing, no debt via cash and an $8,400/month income vs. $6,900/month with financing. Cash has NO risk - if a tenant is late, I have no mortgage to carry. Financing - I've got 23 mortgages.

My wife and I have decided to change our strategy for real estate investing.

Can you guess what we're planning now?

Note - this experiment was done Cēterīs paribus - all else being equal - so rents remained fixed, and so did property values.

One might factor in the increase in equity gained over time in 20 properties vs. 6 - but then again - "equity" is useless unless it's realized (converted to cash) - and doing that only increases debt owed, lowering profits, and such. And when you have paid for properties --- you have 100% equity!

[Inkstain82]

Cēterīs paribus

I see what you did there

[nodmicks]

WOW that was very detailed and quite interesting Greebo!

[Greebo]

I see what you did there

Yeah, I googled

[Greebo]

WOW that was very detailed and quite interesting Greebo!

You think that's detailed? I printed the numbers out on 11x17 pages - 15 of them...

[frugal-fannie]

Nice work up, also the risk is a lot more for more properties. How much do you keep as an emergency fund per each property.

[Vanilla]

Wow, very detail. Great work.
I am wondering if the vacancy rate (for multiple rental units property), also, the cleaning & repairs costs (when tenants move out). I believe real estate investment is a good business.

[Samigirl]

Wow Greebo...that's quite an example of Dave's cash-only principle, and why it works. I guess he actually knows what he's doing . Thanks for laying it all out in black and white. And like Dave says...100% of the foreclosures are on financed property.

[SixxOfDiamonds]

Great job, Greebo! This is really an eye-opener. It makes me want to purchase a property for rent here, we have the perfect place - near a military base! Rentals go for $100-200 more than what you would pay on a mortgage (including insurance, escrow, regular maintenance, etc.) Plus, our area has seen a very slow, but steady rise in housing prices.

I'm going to have to show Mr. Husband this!!

[Greebo]

Great job, Greebo! This is really an eye-opener. It makes me want to purchase a property for rent here, we have the perfect place - near a military base! Rentals go for $100-200 more than what you would pay on a mortgage (including insurance, escrow, regular maintenance, etc.) Plus, our area has seen a very slow, but steady rise in housing prices.

I'm going to have to show Mr. Husband this!!

Um.

Are you sure you understood my analysis?

[Preston]

Good math, and I'll have to read it a few times to make sure I understand it. But I also think there is a hybrid between the two that could be reached.

Having 23 rental property means 23 different places rent can be late? or some other breakdown occurs. Finding 23 renters can be difficult.

But I will give kudos, but I actually figure it's better to have a few rental properties without mortgages than 23 that don't.. just less of a headache.

[Greebo]

Good math, and I'll have to read it a few times to make sure I understand it. But I also think there is a hybrid between the two that could be reached.

Probably - but since long term, the cash only model wins on both monthly income and net income, any hybrid will only diminish the long term returns.

Having 23 rental property means 23 different places rent can be late? or some other breakdown occurs. Finding 23 renters can be difficult.

Finding 1 can be difficult - but yes, you potentially could have 23 lates. Not fun if you need to make 23 mortgage payments.

[SixxOfDiamonds]

Um.

Are you sure you understood my analysis?

Yes - what I meant was that in our area you pay WAY more to rent a house than to buy a house (monthly payments.) The rental market here is really good because of the high tenant turnover. Rentals are listed one day and literally the next they're gone. It's one of the reasons we purchased a house here - because we couldn't get to a house for rent to even see it before it was rented.

I didn't mean I was taking out a mortgage on another house, haha. I just meant that the rental market is very nice.

Oh, and I should add that if a tenant is late and they are military (as most renters here are) you will still get your rent - from the government docked straight from the renters paycheck and sent to you.

[Greebo]

Yes - what I meant was that in our area you pay WAY more to rent a house than to buy a house (monthly payments.) The rental market here is really good because of the high tenant turnover. Rentals are listed one day and literally the next they're gone. It's one of the reasons we purchased a house here - because we couldn't get to a house for rent to even see it before it was rented.

Minus the guaranteed rent from the base, the same is true where I own property. 2 BR apts rent for 800 - the building manage for my mother in law with 2 such apartments the mortgage is 750.

But the point of my analysis was that in the long run, one will do better paying CASH when buying rentals - not financing it...so you concern me that now you're thinking of financing one? Or do I misunderstand...

[SixxOfDiamonds]

Minus the guaranteed rent from the base, the same is true where I own property. 2 BR apts rent for 800 - the building manage for my mother in law with 2 such apartments the mortgage is 750.

But the point of my analysis was that in the long run, one will do better paying CASH when buying rentals - not financing it...so you concern me that now you're thinking of financing one? Or do I misunderstand...

You misunderstand - I was simply comparing the monthly cost of renting versus buying in my area. Understandable that you misunderstood - I didn't exactly explain well (blame that on pregnant brain.)

No, if we bought a house to be used for a rental, it would be after this mortgage is paid off and we have the cash to purchase another straight up. But we're youngins, so we have the time. It also looks like Mr. Husband will be in the military for a while and I'm sure wherever we go (most likely just staying here) the rental market will be good because of the proximity to a base.

We've discussed different investments but never really pictured ourselves as owning a rental property. Mainly because we will NEVER have a mortgage after this one - even if it means living in a shack on the side of the highway. For some reason - and DR would hate me for this - I never quite pictured owning two houses mortgage-free. But I suppose, it's definitely possible! Especially if one of the houses is earning income for us instead of just sitting around.