“The Highest Risk Real Estate”

view original post

Dave Ramsey offers some advice if you’re considering making a foray into real estate investing. The personal finance expert explained what he calls the “highest risk real estate” and why you should think twice before jumping in.

In an episode of The Ramsey Show, a caller from Richmond, Virginia, Matt, asked for advice on managing debt in his growing real estate development business. With projects ranging from $20 to $40 million, Matt is a member of a real estate development group that specializes in creating multifamily communities from the ground up. Although Matt’s business has grown significantly over the years, he asked Ramsey for advice on balancing risk and debt in a sector that depends significantly on borrowed funds.

Don’t Miss:

Ramsey described resort real estate – such as beachfront condos or vacation properties – as one of the most precarious types of investments. “It’s the first to go and the last to come back,” he said, emphasizing how resorts are heavily dependent on the economy.

“If you’re building beachfront condos, you’re asking to die. It’s the worst,” Ramsey warned. When the economy slows down, luxury vacation properties are the first to suffer and take the longest to recover.

While Ramsey warned about the risks of resort real estate, Kevin O’Leary, the Shark Tank star, sees things differently. O’Leary believes resorts can be great investments, especially when they focus on families. “Families want a complete package,” he said in a podcast. They want it to be easy, so they’ll keep coming back. This loyalty makes it cheaper to get repeat customers and creates what O’Leary calls “wonderful recurring cash flows.”

See Also: Inspired by Uber and Airbnb – Deloitte’s fastest-growing software company is transforming 7 billion smartphones into income-generating assets – The deadline to invest and receive your shares this year is 12/20. Join 30,000+ shareholders and invest at $0.26/share today.

High Leverage Equals High Risk

Ramsey emphasized that more debt means more risk: “More debt equals more risk, period,” he said. He advised Matt to raise more equity for his projects instead of relying heavily on loans.

“If you raised more equity and had a smaller loan-to-value ratio … your risk goes down because your cash flow goes up,” Ramsey explained. The more leveraged you are, the bigger the “alligator” eating away at your cash flow until the project generates income.

Trending: If there was a new fund backed by Jeff Bezos offering a 7-9% target yield with monthly dividends would you invest in it?

Avoid Personal Liability

Ramsey’s advice to minimize personal accountability while taking out loans was another important one. He cautioned Matt against personally guaranteeing any debt because of the potentially disastrous losses. One bad deal could bankrupt you, Ramsey warned. “Your house, where your wife, kids and dog live – everything’s gone with one flip of the switch. I would not put my signature on this, no way.”

Instead, Ramsey suggested structuring loans as nonrecourse, meaning lenders can only seize the project’s assets in the case of default and not the developer’s assets. He added that the more equity you have in the deal, the less likely it is that lenders will require personal guarantees.