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Does such a thing as “good debt” truly exist?
Graham Stephan confronted Dave Ramsey about his views on debt on an episode of “The Iced Coffee Hour,” a podcast Stephan co-hosts with Jack Selby. Stephan, a real estate agent and investor, was puzzled by Ramsey’s insistence on avoiding debt even though it’s an integral part of the property market.
Ramsey’s response highlighted the hidden downsides of debt that even professional investors may overlook.
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Good debt vs. bad debt
Ramsey and Stephan have similar views on what they consider to be bad debt, i.e., debt used for consumption.
On “The Ramsey Show,” Ramsey himself once said, “People get credit cards for mainly one reason: so they can buy crap they don’t have money to buy.” Similarly, Stephan wrote in a Substack article, “If holding onto debt does not make you more money, then avoid it.”
However, the two finance experts disagree on good debt. Stephan believes money borrowed to invest in appreciating assets could be justified under some circumstances.
“If buying something does not make you more money, buy it outright. But if it does make you money, then finance it sometimes,” he wrote.
In 2022, Stephan claimed to have $4 million in debt, much of which was in the form of mortgages on his rental properties or his personal residence. Mortgages are considered good debt because, not only does a home provide shelter, but also its value tends to appreciate over time. The same applies to student loan debt, as it can be considered an investment in one’s future income prospects.
Ramsey, however, tries to avoid debt altogether. On “The Iced Coffee Hour,” he said using good debt is “a more effective way to grow fast if that’s your goal, but what people leave out of the discussion is that you’ve increased your risk exponentially. More debt is more risk, period.”
You can invest in real estate without taking on debt thanks to crowdfunding platforms like First National Realty Partners (FNRP), which let you pool your money with other investors and reap the rewards together.
FNRP allows accredited investors to access the commercial real estate sector with exclusive, professionally-vetted deals.
The properties in FNRP’s nation-spanning portfolio are necessity-based real estate — such as grocery stores or healthcare facilities. That means the properties are essential to the local community, often leased by national brands, and likely to remain desirable.
Once a deal is closed, FNRP’s team of experts manages the property so you can focus on finding more deals you love.
Read more: Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
“I had never lost money on a flip,” Ramsey told Stephan. “I was not behind on the loans, they just called them. They had the ability to do that because it was commercial paper, it wasn’t traditional mortgages.”
Commercial property loans often have loan-to-value requirements, credit requirements and terms that are less favorable than traditional residential mortgages. Sometimes, these lending arrangements can have call options that allow the lender to revoke the mortgage.
To avoid complications when investing in real estate, consider platforms like Arrived. Their service allows you to invest in shares of rental homes and vacation rentals without taking on the responsibilities of property management or homeownership.
With Arrived, you can browse a curated selection of homes, each vetted for their appreciation and income potential. Once you find a property you like, you can choose the number of shares you want to buy and start investing in real estate with just $100.
Since recovering from the bankruptcy, Ramsey has continued to invest in real estate. However, he has said multiple times on his show he now buys property outright, and encourages listeners to do the same to avoid debt if they’re able.
But he also understands that many don’t have that much cash on hand, and when it comes to his famed “baby steps” to help get rid of debt and build wealth, paying off mortgage debt is left until the end.
Calculated risks
Although borrowing money isn’t Ramsey’s style, he agrees that leverage could be a powerful tool for someone with the right risk appetite.
“I’ve got a degree in finance,” Ramsey said. “I know how to run an Internal Rate of Return (IRR) [calculation] and I know what the IRR looks like with debt and without debt. It’s not nearly as good unless you’re leveraged.”
You can become a confident investor without a degree in finance when you speak to an expert advisor through Advisor.com.
This online platform connects you with vetted financial advisors best suited to help you develop a plan for your new wealth.
Just answer a few quick questions about yourself and your finances and the platform will match you with an experienced financial professional. You can view their profile, read past client reviews, and schedule an initial consultation for free with no obligation to hire.
You can view advisor profiles, read past client reviews, and schedule an initial consultation for free with no obligation to hire.
Ordinary investors who have the right risk appetite, discipline and calculations could use some good debt to fuel their investments. But for risk-averse investors like Ramsey, a slower debt-free approach might be warranted.
To get started, you can open a high-yield checking and savings account with SoFi and earn up to 3.80% APY Plus, SoFi charges no account, monthly or overdraft fees.
The best part? You can get up to $300 when you sign up with SoFi and set up a direct deposit.
Beware bad debt
Whether your risk tolerance for investments is high or low, bad debt will always be a drag on your financial health and credit score. If you need to take on debt for education or investing in a home, ensure you do your research to find the best rates and terms to suit your income and financial status.
Debt consolidation loans typically have lower interest rates compared to credit cards, and can lower your interest burden. Plus, with just one outstanding loan, you won’t need to juggle multiple payment dates or amounts.
Credible is an online marketplace that lets you shop around and compare rates on debt consolidation loans offered by lenders near you.
Just answer some basic questions about your finances by filling out a form, and Credible will sort through its database and display rates from top lenders near you. From there, you can compare rates and repayment terms to choose the loan best suited for you.
The best part? Checking rates with Credible is fast, free and won’t impact your credit score.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.