This article is about real estate investing for beginners. You will learn how people are getting rich with real estates, but this is your warning and It’s not for everyone. I’m gonna show you the good and the bad of real estate investing and you can decide for yourself whether real estate investing is a good fit for you or not. Now, we’re focusing on rental properties and the concept is straightforward.
There’s three things that are happening. So the first thing that’s happening is okay, you’re renting out your property, and the second thing is that the tenant pays you enough rent to cover your expenses. So, essentially, they’re paying off your mortgage. And the third thing that is happening is that your property is appreciating in value.
So this process builds your wealth, and that’s the overview. It’s very simple, but let’s dig deeper. Now, here’s what I’m gonna show you. I’m gonna show you how you get rich. I’m gonna show you the math.
I’m gonna show you the advantages of real estate investing compared to stock market investing. And I’m gonna give you 10 crucial tips from personal experience, and you must read this. These are gonna save you so much money. Now, let me show you the math.
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 making this article, it’s higher than 4%. 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 gonna 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 the tenants that’s going to pay you rents of $1939 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 As I said, the property is going up in value 4 percent a year. So think about it.
It’s not your $30,000 down pay 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, Jhon, 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 wanna 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 gonna get, especially in 30 years. We don’t know what the we don’t know what the Federal Reserve is gonna do in terms of money printing.
Maybe inflation will get further out of control. Maybe home price is one flates 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 gonna 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 gonna 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. 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, and 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 accounts. So these are some pretty optimistic variables. After 30 years, your 30 grand will become $523,482.
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 gonna be straightforward with you. With a 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. The 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 gonna give you 10 essential tips that’s gonna help you avoid these very expensive mistakes. And this is not gonna be your generic cookie cutter advice. This is coming from my personal experience, and it’s gonna save you a lot of money. It’s gonna keep you protected as well.
My tips number 1
Is to use an LLC. 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. Then you have to deed it and transfer your property to the LLC. You got you have to do this properly.
But what if you have a mortgage? In that case, your lender has claimed to your property. 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 gonna 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 you have an attorney do this. It’s not gonna be expensive because this is very basic stuff for them. But, yes, protect yourself with an LLC. This is a must.
My tips number 2
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 gonna work. Your insurance is gonna 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 gonna be in deep trouble. But this ties in with tip number 1 about the LLC because the L. L. C.
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, highly recommend both. I personally have both.
My tips number 3
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 the credit check. You need permission to pull their credit reports and I would recommend the background checks. Of course, you need their consent. But I do this to filter out the people with red flags.
My tips number 4
Is about dealing with tenants. If you don’t wanna deal with tenants, then it’s gonna cost you money. That’s the truth. So you’re gonna have the option to hire a management company. So they’re gonna 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, etcetera. But all this, this convenience, it’s gonna cost you. How much they charge you, it’s it’s gonna 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 gonna charge, make sure that makes sense financially. If they’re gonna charge you too much and the numbers don’t work out, then then don’t do it.
My tips number 5
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 wanna 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 tips number 6
Deals with the security deposits. 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.
For example, in Chicago, many landlords feel that it’s not worth the potential legal hassle. So they may charge a nonrefundable 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 tips number 7
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 gonna 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, etcetera, and compare that to how much you can realistically rent it out for.
So check the comps and see what something similar is renting out for in the area. And you’re gonna see that many properties, the math just doesn’t work out and you would lose money. Shop around for a good deal. A good deal is when the numbers work out.
My tips number 8
For you is to build a good credit score. If you have a good credit score, then lenders will give you a lower interest rates. If you have a bad credit score, then lenders are just gonna reject you or they’re gonna offer you higher interest rates.
My tips number 9
For you deals with taxes. So, listen, don’t worry about the taxes for your rental property, so let me explain. I’m gonna tell you 2 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.
So how can this be? You’re collecting all this rental income. How are you not gonna pay any taxes on this? It’s because in most cases, you’re gonna 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, etcetera. 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. It’s just a stupid tax rule that makes no sense, but it works in your favor.
My tips number 10
Deals with taxes when you sell your rental properties. You don’t wanna 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 $13,000,000 if you’re single or $26,000,000 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 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 5/29 plan. You can buy some REITs in the stock markets. But seriously, if this doesn’t sound right for you, is 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 gonna 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 gonna see it’s not that difficult. And if you do this, you will open up a whole new sector of investing opportunities for yourself.