Real Estate Investing For Beginners| The Ultimate Guide 2024

Now, here's what I'm going to show you. I'm going to show you how you get rich. I'm going to show you the math. I'm going to show you the advantages of real estate investing compared to stock market investing, and I'm going to give you 10 crucial tips from personal experience, and you must hear this. 

You have to hear these. These are going to save you so much money. Now, let me show you the math. You need to see this, and let's demonstrate with an example.

So, let's say that you have $30,000 to invest, and what are your practical investment choices? You can invest that $30,000 in the stock markets, you can earn interest in a savings account or a CD, or a rental property. So, just for fun, let's compare. So, let's start with the rental property. 

You have $30,000; you use that $30,000 as a down payment to buy a $300,000 property to rent out, and let's say that you get a 30-year fixed mortgage with a 4% interest rate. So, at the time of writing this article, it's higher than 4%, right? I understand that, but I'm sure the interest rates will come down in the future, and some people are thinking about renting out their home that has a 4% or even a 3% interest rate. 

Anyways, in this scenario, your mortgage payments will be $1,289 a month. That's going to be your principal and your interest. Property taxes will be around $400 a month. Insurance will be, let's just say, $250 a month. 

Feel free to adjust these figures, but roughly, your expenses all in will be $1,939 a month. If you can find tenants that's going to pay you rents of $1,939 a month or more, then after 30 years, you've paid off the mortgage. If the property appreciates in value, let's just say 4% a year, then in 30 years, that property will be worth $973,000. 

So, essentially, you've turned your $30,000 into $973,000 in 30 years. So, that's about a 12% return annually for 30 years. So, how does this happen? How do you get a 12% return? It's because you're benefiting from the leverage. So, let me explain.

So, your initial investment was $30,000 for the down payments to buy the property, right? As I said, the property is going up in value 4% a year. So, think about it. It's not your $30,000 down payment that's increasing in value by 4% a year, no. 

It's the $300,000 property that's going up by 4% a year. So, for example, if you make a 4% return on $30,000, then you would make $1,200, but if it's the $300,000 property that's going up in value by 4%, then you make $12,000. 

Okay, in the math that I presented to you, I said the property will go up by 4% a year. Historically speaking, it's between 3 to 5%, which is why I chose the middle 4% annual appreciation.

Now, I want to address this because I know some people are concerned about this. In our example, you might say, "Kingsley, in 30 years, if the property appreciates in value from $300,000 to $973,000, that may not be a lot of money in the future because of inflation." 

You know, I agree that 30 years is a long time from now. My response is, I want to give you a different perspective. So, here's how I see it. So, having a rental property will be your protection against inflation in these crazy times that we live in. We don't know how bad inflation is going to get, especially in years. We don't know what the Federal Reserve is going to do in terms of money printing. 

Maybe inflation will get further out of control. Maybe home prices will inflate way more than 4% a year. Regardless, at the end of the day, you will own a property debt-free. So, let me put it to you like this. Imagine if today you owned an additional property right now that was 100% yours, no debt, no mortgage. Would that be a meaningful amount of money to you? 

It probably would be for most people. It would add to your financial security. I'm sure that you would feel much better about your financial position, and I guarantee you it's going to be the same thing in the future. In the future, if you own an additional property that is 100% yours, no debts, no mortgage, you're going to feel much more financially secure, and it doesn't matter how bad inflation gets because if inflation gets out of control, then your property will just go up higher in value.

Now, let's do this. Let's investigate the alternative that most people would gravitate towards. So, rather than investing your $30,000 into your rental property, how about taking that money and investing it in the stock markets? 

You know, you can buy index funds, you can buy REITs that would give you real estate exposure in the stock markets, and let's say that you make an average return of 10% a year over the next 30 years. That is a generous rate of return, and let's oversimplify. 

So, let's say that you don't pay any taxes on the annual gains. So, this could be done in a retirement account. So, these are some pretty optimistic variables. After 30 years, your 30 grand will become $523,500, and you can compare that to $973,000 with a rental property. So, here's what's happening. Although your rate of return would be higher in the stock markets, you're not experiencing the benefits of leverage. 

So, in the stock market example, it's your $30,000 that's going up in value. In the rental property example, your $300,000 is going up in value. So, let me tell you this, and I'm going to be straightforward with you. With the rental property, you can build your wealth faster compared to the stock market, but that's not guaranteed to happen. 

Things can go wrong with a rental property. Now, bad tenants, vacancies, unexpected repairs, weather-related catastrophes, a housing market crash, you name it. But then again, things can go wrong with the stock market too. All I'm saying is that real estate is definitely a viable investment option. 

It's time-tested. Now, you already understand what you need to do. You need to find tenants to pay off your mortgage as your property goes up in value, but as you know, so many things can go wrong. So, I'm going to give you 10 essential tips that's going to help you avoid these very expensive mistakes, and this is not going to be your generic cookie-cutter advice. This is coming from my personal experience, and it's going to save you a lot of money. It's going to keep you protected as well.

My tip number one is to use an LLC. Please, I cannot stress this one enough. I highly recommend that you operate with a business entity. So, this is for your legal liability protection, and please do this correctly. The last thing you want is some freak accidents or some troublemaker suing you. 

If you're not operating as an LLC, then you can become personally liable, and all of your assets are at risk: your home, your stocks, your savings, all your money. And you must do this correctly. You can't just create an LLC and say that you're operating out of it. No, that's not how it works. 

So, let's say that you're thinking about renting out your home instead of selling it, right? Then you have to deed it and transfer your property to the LLC. You got to have to do this properly, okay? But what if you have a mortgage? In that case, your lender has a claim to your property, right? 

So, how can you just transfer the property from your name personally to an LLC if you have a mortgage? In most cases, the lenders don't care. They're not going to put up a fight if you continue to make the mortgage payments, but sometimes, yes, you need written consent from your mortgage company to transfer your property to the LLC. 

I've never had a problem with this. I would recommend that you have an attorney do this. It's not going to be expensive because this is very basic stuff for them, but yes, protect yourself with an LLC. This is a must.

My tip number two for you is to get landlord insurance. So, you can have your renter get renter's insurance, but you need a landlord policy. So, this is how it's going to work. Your insurance is going to be your first line of defense, but if some kind of freak accident happens and you get sued for more than what your policy covers, then you're going to be in deep trouble. 

But this ties in with tip number one about the LLC because the LLC will protect your personal assets because it separates you from the rental property. But to be clear, you don't need insurance, you don't need an LLC, but I would recommend both. I highly recommend both. I personally have both.

My tip number three is screening for a tenant. So, getting a good tenant is crucial. If you get a bad tenant, it's a disaster. So, I know this from personal experience. It is miserable. Rent is late, rent goes unpaid, it's stressful, and worst of all, they can trash the place. 

So, it's terrible. I would recommend a credit check. You need permission to pull their credit reports, and I would recommend a background check. So, of course, you need their consent, but I do this to filter out the people with red flags.

My tip number four is about dealing with tenants. If you don't want to deal with tenants, then it's going to cost you money. That's the truth. So, you're going to have the option to hire a management company. So, they're going to take care of everything for you: finding tenants, you know, they'll run a credit check, they'll run a background check, and you get to choose who you like. 

They'll collect rent for you, they'll deal with repairs, etc. But all this convenience, it's going to cost you. How much they charge you, it's, it's going to vary a lot. It depends on your city, your area, what services that you're requesting, but honestly, it's like the Wild Wild West when it comes to pricing. Prices are all over the place. 

You'll see. I would recommend that you ask your real estate agents for a referral or ask your friends or family. I would also recommend that you look at Yelp. So, just make sure that whatever they're going to charge, make sure that makes sense financially. If they're going to charge you too much and the numbers don't work out, then don't do it.

My tip number five is to act quickly with bad tenants. If a tenant is not paying, then you have to take action quickly. Don't let this drag out. This may require legal action. Honestly, when this happens to me, I don't want to deal with this. I get my attorney involved, and they know the drill. 

This is standard stuff, but that's why it's so important to screen for good tenants so you don't end up in this bad situation. I have not been put in this situation for quite some time because I learned my lesson as a rookie.

My tip number six deals with the security deposit. So, make sure you know the laws when it comes to the security deposits in your city. Some cities are so strict with security deposit rules, and you can get in big trouble if you don't handle it correctly. So, you may need to put it into separate accounts. 

You may need to handle the interest income a certain way, and if you screw something up, it can be an expensive mistake over something so small, a small detail. So, for example, in Chicago, many landlords feel that it's not worth the potential legal hassle, so they may charge a non-refundable move-in and move-out fee instead of a security deposit. So, please make sure that you know the security deposit rules where your property is located.

My tip number seven is that you must find a good deal when you buy a property. If you just pick an average home or property haphazardly on MLS or Redfin or Zillow or wherever, you can run the numbers, you're going to see that they don't work out. So, finding a good deal from the start is key. You can't just pick any property. 

I'm just keeping it real here. Before you buy a property, run the numbers: the mortgage, property taxes, association fees, special assessments, maintenance, insurance, etc., and compare that to how much you can realistically rent it out for. So, check the comps. 

So, see what something similar is renting out for in the area, and you're going to see that many properties, the math just doesn't work out, and you would lose money. So, shop around for a good deal. A good deal is when the numbers work out. 

My tip number eight for you is to build a good credit score. If you have a good credit score, then lenders will give you a lower interest rate. If you have a bad credit score, then lenders are just going to reject you, or they're going to offer you higher interest rates. So, I have a really good video on how to improve your credit score quickly. So, I'm going to leave a link for that down below as well. 

My tip number nine for you deals with taxes. So, listen, don't worry about the taxes for your rental property. So, let me explain. I'm going to tell you two very important things. The first thing is that it's not complicated to report a rental property on your tax return. So, even if your rental property is within an LLC, it's still just reported on your personal income tax return. It's a piece of cake. 

So, you can easily do it on TurboTax yourself. Your accountant can easily take care of it. It's not complicated, and the second thing is that your rental property is most likely not going to increase your taxes, okay? So, how can this be? You're collecting all this rental income. How are you not going to pay any taxes on this? 

It's because in most cases, you're going to have enough tax deductions from your rental property to offset the rental income. So, you can deduct all the expenses that are obvious to you like mortgage interest, property taxes, association fees, insurance, repairs, maintenance, etc., but additionally, you get a tax deduction called depreciation. 

So, the IRS says that your property is decreasing in value, so you get a tax deduction, which is funny because most likely your property is increasing in value. So, listen, it's just a stupid tax rule that makes no sense, but it works in your favor.

My tip number 10 deals with taxes when you sell your rental property. So, here's my advice. You don't want to pay any taxes when you sell your rental property. So, here's what most people do. If they sell their rental property, they use that money to buy a new rental property. 

It's called a like-kind exchange, and then you don't pay any taxes, or people hold on to rental properties until they die, and then there are tax benefits when you die. Your heirs will receive the property with no tax consequences, and when they sell it, they won't have to pay any taxes. 

This applies to you if your total assets are less than $13 million if you're single or $26 million if you're married, and this gets adjusted for inflation each year. So, if you have less than those amounts, then you and your heirs will not pay taxes. It's called the death tax exemption.

Alright, listen, this is very important. I walked you through the process of how you get rich over time, and I gave you some solid tips from experience for your protection. If this all sounds overwhelming or too crazy, you may just want to consider your alternatives, such as just adding more money to your retirement accounts, buying index funds, maybe a 529 plan. 

You can buy some REITs in the stock markets, but seriously, if this doesn't sound right for you, if it sounds like a big headache, then don't do it. Stay away. I like real estate investing because it gives me diversification outside of the stock markets, and the tax advantages are just wild. 

But if you're going to move forward with the rental property, then I am cheering you on, and once you gain some experience and you get into the rhythm, you're going to see it's not that difficult, and if you do this, you will open up a whole new sector of investing opportunities for yourself. I thank you for the support, and wish you a very nice day. Take care.