How Debt ACTUALLY Works and When You SHOULD Buy a Home

Dave Ramsey has lost his mind. Today I’m going to explain how debt ACTUALLY works and when you can and should purchase a home. I currently own over $18 million dollars of real estate. The big reason I’ve been able to grow that portfolio to that large at 30 years old is because I have used debt properly. Debt can be a death nail if used improperly, however, when used properly it is an incredible tool to help you build your net worth. I’m going to talk about debt, I’m going to talk about when it’s time for you to purchase a home, all of the bad Dave Ramsey advice that is out there. 

Dave Ramsey made a statement recently that I believe is horrible advice. Here it is: 

“A credit score is nothing but an “I love debt” score. It’s proof that you’ve borrowed money and paid it back, so you can borrow more money and pay THAT back. And the cycle goes on forever. If you want a life without payments, stop chasing a life with payments. 

When I talk about this, people usually ask how to buy a home without a credit score. It’s completely possible and it’s called “manually underwriting.” Mortgage lenders used to do this all the time. They simply verify your ability to repay by checking things like your employment and record of paying things like rent, utilities, and other applicable bills. 

Don’t believe the lie that you need a credit score. You’ll be just fine without one.”

This statement for me is absolutely mind boggling because your credit score is extremely important when it comes to building your net worth and putting you and your family in a safe place. I’m going to talk about all of that, proper use of debt, building your credit score, and other things that Dave Ramsey has talked about as far as when is the right time to purchase a home. 

I believe Dave is misleading people in a huge way and putting them in a place where their net worth is going to be very stuck. They’re going to have to work their brains out for their entire lives and never put themselves in a place where they can enjoy life or get to a point where they can live a comfortable life financially. 

With Dave’s strategy you can get there, it’s just not going to be until you’re 65 or 75 and your life is kind of over. You’re not your healthiest, not happy, you haven’t enjoyed the process of life. On top of all that you’ve made stupid financial decisions because you’ve listened to Dave Ramsey. I know that sounds harsh but I’ll go through and explain my reasoning for saying this. 

How do you build a credit score? 

All you need to do is get four lines of credit. You can even have just one or two, but four is best. The best way to do it is to get a credit card. Dave Ramsey is anti-credit card completely. Here are the advantages and reasons why I think they are good: 

  1. If you pay it off every month, you are never paying interest. So you can get a credit card, run it up, and then pay it off at the end of the month. You won’t pay any interest. While doing that, you’ll be building your credit. Never use over 10% of your debt limit. 20% is probably ok but the less you use on the card, the better off you’re going to be. They look at how much of the card you use. You also never want to carry a balance into the next month, because then you’ll be paying interest on that balance. 
  2. They help you build your credit for approval on car loans and home loans. With a good credit score not only are you going to get approved but you’ll also get lower interest rates. So the debt you get in the future is going to cost you less. This is a huge advantage when owning a home. Even Dave Ramsey says owning a home is an okay form of debt. 
  3. Credit cards have huge perks over debit cards. For example, if you have fraud on your credit card, you call them and they get it taken off. It doesn’t affect your credit score as long as you call them and get it fixed. They’re immediately going to put that money back, you won’t be charged for it. This is part of their policy with the credit card. You also have a ton of other protections when it comes to getting rental cars and a myriad of other things. Credit cards protect you so that any of the money you use is very protected. If it’s stolen, charged, or anything happens, they’ll just send you a new card. They give your money back and it’s very low risk. If you use debit cards, cash, or checks, and they got stolen or forged, etc., it is a longer and more painful process. In some instances you never get your money back or if you do, it’s a long drawn out process. With these non-credit card options, you are immediately taking your money out so your cash situation is worse. With a credit card, you have a 30 day loan before you have to pay anything. If you’ve got your money in an account that’s paying interest, that’s advantageous. As long as you pay your credit card bills, you’ll be fine. You’re building credit in the process and you’re more protected if something happens. 
  4. The only reason a credit would be bad, is if you’re stupid. It gives you 30 days longer to pay your bills. Some people will run a balance up and leave it month to month and pay interest on it every month. And the only way they can avoid this is by having a debit card where they’re unable to spend money they don’t have. If that’s your philosophy on life, I don’t know what to tell you. That’s just a stupid decision. If you commit to get a credit card please just be smart. Pay it off on time. Don't overuse it. Stay below that 20% and preferably that 10% usage. Pay it off every month. 

You're going to build up your credit and then the world will be opened to you. When it comes to getting good debt that you can use on purchasing a home or purchasing rental properties that

then are going to pay you every single month. Go get credit cards, use them and pay them off every month and start building your credit score. It does take a while to build. Just make sure that you make your payments every month and you're going to be in a great place.  

Now we're going to jump to the next dumb advice from Dave Ramsey. Right on his website it says the best way to buy a home is to put 100% down. If paying cash for your home isn't in

the cards this year, set a goal of saving at least 20% of the home price as a down payment. He explains why he feels this way and it's because he doesn't want you paying mortgage insurance. For some reason he doesn't want you to put a low down and I know mortgage insurance is part of it. Essentially mortgage insurance is another fee you have to pay every single month on top of your interest and principal. Interest and principal are part of your mortgage and then that mortgage insurance is on top of that. 

What’s so hilarious about him not liking mortgage insurance is he just told you in that recent post to do manual underwriting. If you don't have a credit score, you will have to pay higher interest rates, higher closing costs. You're giving up paying mortgage insurance but you have to save way more for down payments and wait a lot longer before you can get into a home. Then you're gonna have to pay higher interest rates and get hit with more fees because of manual underwriting. 

It just seems like an absolute joke because you're trading one for another and for a lot of people, even if you're saving to only 20% compared to saving 3.5% down and getting an FHA loan that could be five to ten years of saving for some people. Now maybe you're aggressively saving and it's just a couple of years but that's still a couple of years where your home could be going up in value. You could be paying down the principal on the mortgage which is essentially a savings account for that property. 

Another thing is you're getting a smaller return on the investment of your home. Let me explain. If you save up to 100%, which Ramsey says is the best idea, there are a couple things happening. First, while you're saving you're still paying rent every month, guess how much of that is going into a savings account of principal pay down? None. Guess how much of that is

going towards helping you build up equity in your home because the home is going up in value

3% - 5% percent every year? Nothing. 

Some people want to save up for 100% of their home while paying rent for 5 - 10 years. They're not getting any of that money back. I want to show you an example so that this makes sense: let's say you've got a person that's going to put 3.5% down on a home. They also set aside 6 months’ reserves or you could even do a year worth of reserves. That's probably going to put you at instead of having 3.5% worth of money that you need, let's say you have 10% of the money you need to be able to purchase this home. You can have massive reserves for your mortgage, massive reserves for whatever spending you have, and you have money for a down payment and then a mortgage with mortgage insurance. 

Odds are if you purchase the right home that monthly payment is going to be the same that the person over here is paying for rent every month. For example, let's say they're both paying $2,000. This guy is paying $2,000 a month on his mortgage, his mortgage insurance, all that stuff. He has 5 - 10% percent reserves. The other guy now has saved 10 - 15% percent he's got to save all the way to 100% to be able to purchase a home in cash. The homeowner every year is getting 3 - 5% on the whole home and he only put 3.5% down. That means that his return on the whole home isn't 3 - 5% because he's getting 3 - 5% on the entire purchase price. So if he bought a home for $100,000, he only needed $3,500 to be able to purchase that home but that home's going up in value by 3 - 5%. Let's say it's just going up by 3.5% every year, that means his entire down payment he's getting in equity every single year because the property is going up in value.

If you live in a market like I have the last five years, every year my home has gone up by 10% or more. So he could have bought it for 3.5% down and it could have gone up in value by $10,000 every single year. That's literally like 300% return plus on his down payment in one year while the other guy is paying rent every month, getting 0% return on his money. Also this guy has tax advantages because part of his mortgage is interest. He's going to pay less in taxes because of that. The other part is principal pay down so again that's equity he's getting in his home. That's a return he's getting that is being saved in his home. So he has equity from principal paydown, he's getting equity because the property is going up in value by 3 - 5%, he's getting tax advantages and he's paying the same every month as the guy over here paying rent. And guess what? He's got a ton of reserves because he's in a good place while the other guy is still saving and saving and saving and saving. 

You look at 5 - 10 years down the road where this guy finally has enough money to buy a house. Guess what? Homes have gone up in value by a ton so now he has to save longer while this guy is probably sitting on hundreds of thousands of dollars worth of equity in his home. Also if this guy is following Dave Ramsey's advice, he finally can buy the property in cash. Or maybe he still needs to get a loan because he can't afford it but he hasn't been building credit so he's going to get crappy interest rates and he's going to be in a place where he's paying way more for a home. 

On top of all of that, for let’s say, 10 years he had to live in a property that wasn't his. He had to have all these restrictions because it's not his home. He has to deal with the landlord that's probably increasing rent every month. He's not getting any equity in that, it's just money that's going out the door because he's having to pay more and more every year. This guy's mortgage is locked in, never went up at all. There’s no risk of it going up because he owns a home.

All right guys I’ve got to take a deep breath because I'm fired up! The reason i'm fired up is there are a lot of people that latch onto Dave Ramsey's advice, and it's just bad advice! It's bad advice for a couple reasons: 

First of all, Dave Ramsey has you living in a world of future value. He preaches that you've got to be miserable for a very very long time before you can make smart decisions that are going to put you in a good place. That's not true. There are things you can do right now to put yourself in a good financial place. 

If you've been stupid and you're $50,000 or $100,000 in debt, Dave Ramsey's advice is probably going to be good for you because your brain isn't working the way that it should when it comes to viewing debt. You need to get out of that, and that's one place where I do want to take my hat off to Dave Ramsey. He's figured out how people's brains work when they're in this massive debt hole, and if you are, I'm not saying his advice is bad for getting out of debt. If you're in a place where you're not in debt and you could be building your credit the proper way by paying it off every month, you could be getting into a house. 

You could be living in a home that you love, that you can make yours that you can build memories in with your kids, with your spouse with whoever it may be. You're giving all of that up and this potential incredible investment and the potential for you to start investing using debt so that you can have cash flow that now pays your mortgage, your car, that now puts you in a place where you don't have to work till you're 65. You could literally retire at 25 or 30. You could be in a place like I am where I can build my dream home. I can have my dream cars. I can have the things I want because I understand debt and I use it properly.

I keep proper reserves so that if bad things do happen I'm still in a great place. If you have the proper reserves if you've bought property properly using debt, you've gotten the right loans where they can't be called due, interest rates aren't changing every 5 - 10  years, where you're not doing all the stuff that Dave Ramsey did when he was young and stupid that ended up burning him. If you use that properly then you can put yourself in a substantially better financial situation way sooner in your life than if you follow Dave Ramsey's advice. 

Again, if you're in massive debt go hit up Dave Ramsey. Get out of debt. Get back to ground zero, but then come and listen to this advice because debt used properly will change your life and get you where you want to be substantially sooner. It'll protect you. 

Having a credit card is a huge protection for me because I've had it stolen multiple times. I've had people steal the number. I've had them charge the card, doing all kinds of stuff, and guess what? It didn't affect my credit score. I always got that money back and I got it back quickly. I didn't even have to pay it ever. They never took it out of my account and never put me in a vulnerable situation because I don't use a debit card so I don't have to worry about all the negatives of that. 

I've built an incredible credit score and invested in real estate. I have a home that over the course of the last three years of ownership it's gone from being worth $420,000 to being $750,000. That's hundreds of thousands of dollars I've made in equity. I’m going to sell my home and I now have this $300,000 plus worth of money because I purchased a home when I did.

Someone else that would have listened to Dave Ramsey's advice and not purchased a home, three years later is still saving for a house. They're nowhere near having enough because they could have purchased it for $420,000 and now it costs $750,000. They've got money sitting in a bank that's going down in value 2 - 3% every year and right now way more because of inflation. So please learn these rules. Don't fall into the Dave Ramsey trap because if you do, you're going to regret it down the road. 

That's all I've got for you. If you want to learn more about how to invest in real estate, and how to use debt properly, check out my YouTube channel. If you're ready to start investing in real estate and making money by using debt properly you can purchase my real estate investing course. It's going to show you the step-by-step process of how to use debt and invest in real estate.