Radio host and author Dave Ramsey frequently speaks with people seeking advice on important financial decisions.
He strongly advises people that their number one priority, after making sure you have built up an emergency fund, should be to pay off all debt.
Related: Another fast food operator files for Chapter 11 bankruptcy
These include student loans, car loans, and credit card debt. But Ramsey makes an exception for homeowners.
Because people are building equity in their homes with mortgage payments, that’s debt worth carrying, he says.
Ramsey advises potential homebuyers to choose a 15-year mortgage. He also emphasizes that people should not try to buy a house that is too expensive.
If you’re paying too much of a mortgage, that burden can make you “house poor,” he explains.
Some people buy homes with the intention of making changes to them that will increase their value. They then hope to sell them, for an amount greater than what they bought them for, in order to profit from the sale.
Shutterstock
Flipping a House as a Real Estate Investment
A woman who identified herself as Erin recently asked Ramsey about exactly that scenario.
“Dear Dave,” she wrote, according to Ramsey Solutions. “My husband and I want to live and buy real estate. The idea is to buy a fixer-upper and rent out the basement to help with the mortgage payments. What do you think of ideas like this?”
Ramsey first suggested that anyone seeking advice make sure some of the basics are taken into account from a planning perspective.
“In a situation like this you need to do a basic business analysis,” he wrote. “You have to have a plan in place and you have to figure out the worst-case scenario. Part of this is determining if you can survive if things fall apart. In this case, the worst-case scenario is that ‘I can’t get a tenant and the house is not sold. “It puts your family in danger, so it’s not an option for me.”
The personal finance personality added some insights into the questioner’s current state of thinking about the decision.
“Do you want my honest opinion?” Ramsey asked. “I think you both have a case of house fever right now. The possibility I just mentioned is not uncommon. Many people have had the same idea, with the best of intentions, and it still ended up in a big mess.”
Ramsey also explained a little about his personal feelings about the real estate business.
“I love real estate. I mean, I really love real estate. And I’ve flipped more than a few houses in my time,” he wrote. “But the details of this deal make me a little nervous.”
“If you and your husband are willing to accept the possibility that things may not go as planned, and the fact that you may have to take on extra jobs for an unknown period of time just to make ends meet, then you could be a play,” he continued. “But for me? No. I don’t like putting myself in these kinds of situations.”
Ramsey then added some advice based on his own personal experience.
“When I was much younger, I was willing to do all kinds of dangerous things and ignore the risk,” he wrote. “But the bankruptcy decades ago quickly took away those kinds of thoughts from me.”
“Any deal that risks leaving you bankrupt or a victim of foreclosure simply isn’t worth it, Erin.”
Get exclusive access to portfolio managers and their proven investment strategies with Real Money Pro. Start now.
