Bankrupt by 28: Why Dave Ramsey lost MILLIONS in Real Estate

What's up you guys? It's Graham here. So here's a very familiar sounding story about someone who got his real estate license at the age of eighteen, began investing in real estate in his early 20s, amassed a four million dollar real estate portfolio with a net worth of a million dollars by the age of 26, and by the age of 28 lost it all and went bankrupt.

This is actually really freaky how much this sounds like me, but it's not. And obviously, the name is already in the title, so you know who it is. But we're talking about Dave Ramsey, and many of you guys have warned that the same thing can happen to me as well. So what are the chances that I might meet a similar fate, given all of the similarities between me and a young Dave Ramsey? Is it possible that I might go bankrupt by investing in real estate? And most importantly, how did this go so wrong for Dave Ramsey, and how could you avoid making the same mistakes so this doesn't happen to you?

Well, you guys will find out as soon as you hit the like button. As soon as you click that button, I'm there. We go! Thank you for clicking the like button; let's go on.

So here's what you guys need to know. Dave Ramsey got his real estate license at the age of 18 and began investing in real estate in the early 1980s. He'd buy properties, fix them up, and then flip them for a short-term profit. Now, doing this during an appreciating market is any investor's dream because not only can you renovate a property and increase the value, but also values are simultaneously just going up at the same time. It's like double-dipping in profits.

So what most investors do when they finance real estate flips is that they take out short-term loans to save money. Now consider this: the rate for a 30-year fixed-rate mortgage right now is about four and a half percent, meaning on a $500,000 loan, your payment every single month is going to be twenty-five hundred and thirty-three dollars. But what if instead of doing that, you decided to take a 3-year interest-only adjustable rate mortgage at three and a half percent interest on $500,000? Your payment would only be fourteen hundred and fifty-eight dollars per month! That's over a thousand dollars a month cheaper by just taking out a short-term loan.

And anytime you're flipping real estate, chances are you're gonna be selling it way before your loan becomes due or readjusts in price anyway, so why pay more money than necessary? Now from there, loans get even more extreme. You can take out one-year loans. You can have loans with balloon payments, which means the entire amount becomes due at a certain time period in the future. Or you could do what Dave Ramsey did, which was 90-day loans. Yes, I said it—ninety, nine zero day loans.

Typically, this is a loan where the term is renewed and agreed upon on a 90-day basis. This means that the bank pretty much says, “Okay Dave, we're gonna lend you $500,000 for the next 90 days at a set amount of interest that you'll pay us. If you don't pay back the full amount after 90 days, we can review our terms and then look at renewing this for another 90 days. Then after those 90 days, we can take a look at this as long as you're paying us interest; we can talk about renewing for another 90 days as long as needed."

Now, loose lending practices in the 1980s made this extremely attractive for real estate investors because you can buy a property for cheap, fix it up, and flip it within 45 to 60 days, pay back the 90-day loan, and you are done. So what's the deal? Closure means you've paid off the loan, you've made your money, and it's on to the next one. This is how Dave Ramsey was able to make a substantial amount of money in his early 20s, and much of this was due to speculated real estate investments.

But here's where things started to go wrong. In the mid-1980s, real estate values were artificially high, and they were fueled by tax codes which made real estate a favorable method of tax avoidance. See, the thing is many wealthy investors at the time chose to dump all of their money in real estate to lower their taxable income. They chose to do real estate over just about any other asset out there because of this, and this increased real estate prices beyond what was reasonable—that was until the Tax Reform Act of 1986.

Now this tax reform changed everything. Prior to this, for someone in their top-tier income bracket, they would keep 80 cents for every one dollar of capital gains that they made. After this, that same person would only get to keep 66 cents, or they would get to keep 72 cents if they were in the 28 percent tax bracket. But arguably, most of the money pouring into real estate anyway was from top-tier income earners, who this really impacted the most.

After that tax change, it depressed the values of real estate, causing them to sharply decline. Now if that wasn't worse enough, prior to 1986, you were able to depreciate real estate over 19 years. This meant that if you had a property worth 1.9 million dollars, you were able to depreciate that property $100,000 every year. That's basically $100,000 that you don't have to pay tax on. Now after 1986, you can still depreciate all 1.9 million dollars, but instead of over 19 years, you had to depreciate that over twenty-seven and a half years.

This meant that instead of depreciating $100,000 per year, now you're only depreciating $69,000 per year. Now if you combine those two together, that means that you're getting 30% less in write-offs and also paying 17% more in taxes. Now you should be asking yourself right now, why was this tax code even changed in the first place? And the reason why is because this made real estate an artificially better investment than other assets out there strictly for tax avoidance.

That tax reform was really meant to level the playing field between investing in real estate and investing in other assets out there, and that it ended up doing so. After that tax reform went into effect, the values for real estate dropped, and demand to buy real estate dwindled. Now at that point, Dave Ramsey's largest lender was acquired by a bigger bank, who began taking a closer look at Dave Ramsey's loans and determined that they were too risky to continue renewing. The bank demanded that Dave Ramsey pay off the loan within 90 days, as originally agreed upon, with no further extensions allowed.

So what happens here? When the real estate market drops, you can't sell your property, and the lender asks that you repay them within 90 days. And the answer to that is: you were screwed. And that's what happened to Dave Ramsey. Dave Ramsey invested in a real estate market that was fueled and inflated by investors seeking tax deductions on 90-day loans looking to flip them for a quick profit.

And that, you guys, is incredibly risky and incredibly stupid. Sure, it has potential for some massive wins, but also just as big of losses. This is something I would never recommend anyone do under any circumstance. Now let's compare that with what people are doing today and also what I am doing. We are buying properties on a fixed-rate conventional loan. These are loans that conform to standardized lending practices that don't have call provisions, and it means that the price is fixed throughout the term of the loan.

This basically means the bank cannot just come to you one day and say, “Hey Graham, the market went down 20% in price. You have to pay us everything back, and you have 90 days to do that.” It also prevents them from going and changing the price. If the price that we agree on right now is the price, then that's going to be what I pay for the next 30 years, basically no matter what happens.

The bank has to stick with their agreement over the next 30 years, regardless of what happens to the US economy. This is backed up by the US government. When someone takes out a 30-year loan, that loan is guaranteed. No matter what happens, their price is going to be fixed, and after 30 years, they're going to own the property outright, no matter if that loan is sold, no matter if the bank is sold, no matter what happens with the real estate market. Your price is your price, and that agreement is the agreement.

Now, keep in mind that today, and probably 99.9% of mortgages out there, the only call provision is what's called a due-on-sale clause. This means that anytime you transfer a property or sell it to someone else, whatever balance of the loan that you have becomes due at that time. This is to prevent people from going and doing what's called a subject-to sale, which means that if I have a very low interest rate, I can lock that in and then sell that to someone else who's willing to pay more for that property while still keeping my original loan. Basically, this just prevents the new buyer from going in and taking over my loan without paying the bank, and the bank would have no recourse to do anything about it.

This is why they have what's called the due-on-sale clause, and this honestly makes sense. The biggest difference here between Dave Ramsey and what I do, and what I recommend everyone else do, is that anytime you're investing in real estate, you take out a fixed-rate 30-year loan, which means that your rate is going to be fixed for the entire duration of that loan. And then when that loan is done, your property is paid off in full.

If my payment today is $3,000 per month, I will have the same $3,000 a month payment 10 years from now, 20 years from now, 25 years from now, and 30 years from now. And then after that, I own it outright. My interest rate won't go up during that time. Banks can't just call the loan due at any time, and what I pay is simply just what I pay.

When the numbers work on something like this, doing this is extremely safe because it's stable; it's predictable—you know exactly what your payment is going to be. Usually, in the worst-case scenario, as long as the property cash flows, your worst-case scenario is usually just breaking even, and then you own it outright after 30 years.

Now, if Dave Ramsey had taken out a fixed-rate 30-year loan in the 1980s, he could have just held his properties, kept them, hopefully they cash flowed, and then 30 years from now, not only would that real estate be incredibly valuable, but he would have paid them off in full and be owning them outright right now.

Had he just taken out a long-term fixed-rate loan, again, my entire strategy has just been this: take out a 30-year fixed-rate low-interest mortgage and make sure the property generates enough rental income to cover that mortgage plus preferably a little bit extra in your pocket. Then when you do that, you just wait. Sure, you're probably not going to be making a killing in cash flow every single month, but it's going to be safe, steady, predictable, and reliable, and after 30 years, that property is going to be paid off.

You could fall so hard then because you know everything you make at that point is pretty much profit paid for by somebody else over the last 30 years. You can build up a very sizable net worth by doing this, especially if you're in your early 20s. By the time you're 50 years old, you're gonna basically be, you're gonna be printing money.

This is why I'm never worried about something happening with the market or something happening with my bank and a loan being called due at any time, because simply that is impossible to happen. It's not even in the reality or the realm of possibility. And this is why I also recommend that you take out, anytime you're investing in real estate long-term, fixed-rate low-interest rate loans for anything you buy and make sure the property at least cash flows.

And that is also how you could avoid going bankrupt like Dave Ramsey did at the age of 28. So with that said, you guys, thank you so much for watching. I really appreciate it. If you guys enjoy videos like this, if you haven't already, hit the like button. Hit that like button! Also, feel free to subscribe. I post 3 videos a week: Monday, Wednesday, Friday.

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