New York (CNN/Money) - It's a sure bet, right?
With interest rates as low as they are and real estate values rising as they have been, investing in rental property is, at first glance anyway, an easy way to make money.
Rental property can be a golden investment opportunity. Still, there's much more to it than buying a few units and watching the checks roll in. "You can get in some real hot water if you don't know what you're doing," said Janet Portman, author of "Every Landlord's Legal Guide."
If you think the biggest hurdle in buying rental property is coming up with a down payment and qualifying for a loan, you'll be pleased to know that this may be easier than you'd expect.
"The best way to get started is to buy a home to use as a rental but make it your primary home for one year," said Gary Eldred co-author of "Investing in Real Estate." He bought his first rental property when he was 21 years old using $1,000 from a student loan.
By living in the property for some time, you'll save on mortgage interest. Rates for primary residences are generally one-half a percentage point lower than rates on investment properties, and have lower fees, according to Keith Gumbinger, vice president for HSH Associates. That may not seem like much, but over 30 years you'll save almost $20,000 in interest if you borrow $150,000 at 6 percent rather than 6.5 percent.
"It is a bit of a gray area in terms of how long you have to live in a house to satisfy requirements of the lower mortgage rate, but I recommend staying in the house for at least one year," said Robert Irwin, author of "How to Get Started in Real Estate Investing" and dozens of other real estate books.
Once you're ready to rent out the property, you can take out a second mortgage or home equity loan to use as a down payment toward a second home, according to Eldred. Then you move into the new house, rent out the first and start the process over again.
While tapping into your home equity may be the easiest way to come up with a down payment on rental property, it is not without risks. For one, if the value of your home (hence, your equity) falls drastically, you could potentially owe money when you sell the house.
As with any investment, it's critical that you do your due diligence before you buy.
"People make the mistake of buying property without knowing what kind of rent it will get," said Eldred. "Before you buy a property, you need to research the rental properties, factor in your expenses, and make sure you have some reserve funds to hold you over if the place doesn't rent quite as fast as you'd hoped."
Take a look at similar rentals in the neighborhood to see how much you could charge for rent.
Then make sure that amount will be enough to cover the mortgage payments and still have money for income taxes, property taxes, insurance premiums and maintenance costs. If you borrowed money for your down payment, you'll need to have a little left to pay that back as well.
Rental properties come in all shapes and sizes, command different rents and attract different kinds of tenants. Your choice will depend on how much you can afford and what hassles you're willing to take on.
Some landlords target the segment of the market that probably cannot afford to buy a home. Low-income rentals have the highest cash flow per dollar of investment, according to Eldred. Also, owners of such properties worry less about losing tenants to the housing market.
But this part of the market generally requires more work. "Some people just aren't cut out to deal with the high turnover or collection issues with this clientele, and property values in this area may not appreciate as fast as other parts of the market," said Eldred.
For these reasons, other landlords specifically avoid buying low-cost rentals. "I've found that if you have a quality house you can always find people to rent," said Irwin, who also believes that single-family homes are a better bet than duplexes, condos or co-operatives. "My experience on the lower end has not been good."
A compromise between the two may be found in marginal neighborhoods that are close to booming areas, said Eldred. "You get the cash flow along with a possible boost in the value of your property," he said, adding that this is how most people get started investing in real estate.
Regardless of what type of property you plan to buy, don't buy a house that's farther than you can drive in 45 minutes, warns Irwin. "The one rule that is cast in cement is that you cannot manage properties at a distance," he said.
Before all is said and done, you need to understand your obligations as a landlord.
Some states are more regulated than others. In California, for example, there are rules for everything from how much security deposit landlords can charge to when they can visit the property. In Arkansas, Alabama, Colorado and Indiana, where there is little regulation, the state doesn't even require that landlords maintain "habitable" property, according to Portman.
In familiarizing yourself with rental laws, you'll want to pay particular attention to what criteria you can and cannot use in accepting or rejecting tenants. There is often a fine line between careful screening and discrimination. "The most important moment in a landlord's life is the choice in tenants," said Portman. "If you screw up there you're in for nothing but grief."
You'll also want to make sure you have enough insurance to protect the property itself and cover any and all liabilities. As such, Portman recommends having at least $1 million in liability insurance.
Finally, be prepared to lose some sleep. Even if you don't plan on doing all of the handy work yourself, you'll still be on the receiving end of late-night calls about everything from hot water heaters to lost keys.