NJ Man $1.8M in Debt Sells Everything — But Dave Ramsey Warns of a Major Mistake

Tom’s Financial Crisis: A Cautionary Tale of Debt and Risk

Tom, a 30-year-old former commercial real estate analyst from New Jersey, found himself in a dire financial situation. In early August, he called into The Ramsey Show to share what he described as “quite the financial mess.” His debt burden is staggering—over $1.8 million in total, including four mortgages, a car loan, and credit card debt.

Before being laid off seven months ago, Tom earned $130,000 annually in commercial real estate credit risk. Now, he works as an Uber driver, which he admits isn’t a great income. His wife still has a full-time job that pays $130,000 a year, but the couple is worried about their financial future. Their story highlights the risks of taking on too much debt and the consequences of poor financial planning.

The Weight of Multiple Mortgages

Tom and his wife currently pay $4,400 a month toward the $540,000 mortgage on their primary residence. They also have three rental properties, which are more of a strain than a source of income. The monthly payments on these investment properties add up:

• Rental #1: $2,956
• Rental #2: $1,019
• Rental #3: $1,184

This doesn’t include property taxes or home insurance. The couple is behind on both, owing $6,000 in property taxes and facing $1,000 in forced insurance. They also have a car loan and credit card debt. The only positive note is that they have $12,500 in emergency fund savings, but it’s not enough to get them out of their current predicament.

In desperation, the couple is considering selling all their assets, including their car, home, and three rental properties. This includes the one Tom purchased with a business partner.

The Risks of Real Estate Investment

Dave Ramsey, the financial expert, warned Tom that he took on too much risk. “You went into all these properties thinking there was no risk and the tenants were going to pay everything,” Ramsey said. “And you found out the more debt there is, the more risk there is. And you just took on a boatload of risk for no money.”

A common mistake among landlords is assuming that rental income fully covers their mortgages. In reality, lenders typically count only about 75% of projected rental income when determining affordability. Even if you can handle the costs, managing properties and dealing with tenants adds another layer of complexity.

Alternatives to Traditional Real Estate Investing

Today, you don’t need to buy multiple properties or take on additional mortgages to benefit from real estate appreciation. Platforms like Homeshares allow investors to gain exposure to owner-occupied homes in top U.S. cities through its U.S. Home Equity Fund. With a minimum investment of $25,000, this option offers nationwide diversification and built-in 45% downside protection.

Real estate crowdfunding platforms like Arrived also offer an accessible way to invest in real estate. With a minimum investment of $100, investors can enjoy the benefits of real estate without worrying about debt-to-income ratios or multiple mortgages. Arrived provides access to SEC-qualified investments in rental homes and vacation rentals, offering monthly rental income and capital gains at the end of the investment period.

The 28/36 Rule: A Key Financial Benchmark

When it comes to affordability, most lenders use the 28/36 debt-to-income rule. This means that no more than 28% of your gross monthly income should go toward housing (mortgages, insurance, taxes), and no more than 36% should cover all debts combined, including car loans, student loans, and credit cards.

Even if you’re comfortable with these numbers, it’s important to consider what happens if your income is cut in half due to job loss, illness, or other unforeseen circumstances. Suddenly, multiple mortgages that once seemed manageable could push your debt ratio into dangerous territory.

Final Thoughts

Owning rental properties can be a path to wealth, but as Ramsey advised Tom, the risks grow with every mortgage you add. By exploring alternative investment options and sticking to sound financial principles, individuals can build wealth without taking on excessive debt. Whether through real estate crowdfunding, diversified funds, or careful budgeting, there are ways to protect yourself from the pitfalls that led Tom into his financial crisis.