Find Good Investment Property

The idea of owning rental real estate seems to be gaining popularity as investors tire of the swoops and swoons of the stock market. As I pointed out in a separate column, not everyone has what it takes to be a landlord. But those who do may find rentals to be a good way to build wealth.

Once you've made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research.

Here's what you need to know to get started:
Know your time horizon
As with any other investment, you should have a good idea how long you plan to own a rental property before you buy it, says Robert Cain, publisher of the Rental Property Reporter newsletter.

The longer you plan to own the property, the more you'll probably need to invest in maintenance, repairs and improvements, Cain said.

"If you're keeping it for 20 years, at some point you're going to be putting a new roof on that property. You're going to be putting in new appliances and doing some major repairs," Cain said. If you're only planning to own a property for five years, by contrast, you'll probably want to avoid making any major improvements unless you're sure you can recoup the cost with a higher sale price.

You also may face more investment risk with a shorter time horizon. Although your rental will almost certainly appreciate over 20 years, it could easily lose value in the next five, particularly if you're buying in an overheated market. You'll need a bigger potential annual return to make up for that risk.

For many small investors, long-term ownership makes the most sense, said Pat Callahan, an attorney, landlord and founder of the American Association of Small Property Owners. You'll have plenty of time to ride out any swings in the market, and rental income can make a nice supplement to your day job. Find enough rental properties, and being a landlord may become your day job.