survive the varying difficult challenges that may be encountered."

Equally important as your personal disposition are the numbers involved, says Steven L. Daniels, attorney with Arnstein & Lehr law firm, West Palm Beach, Fla. Will the cash flow generated by the property be sufficient to cover the property's "carry," which consists of the mortgage-loan principal and interest, real estate taxes, insurance, maintenance and miscellaneous expenses?

"If the purchase is purely for income purposes, the numbers are very important," Daniels says. "If it's partly for long-term investment, a positive cash flow may not be as important to the purchaser as potential long-term increase in value."

Keep in mind that the greater the financial investment in the property, the lower the cash flow requirements, says Daniels. "If a buyer invests 20 percent in the purchase of a property, then the rent collected would only need to cover principal and interest on the remaining 80 percent, whereas a purchaser who only invests 5 percent of the purchase price will have a much larger cash flow burden."

Next, what you need to determine is what type of property you want to own, says Daniels. "Will it be a low- to middle-income or a middle- to high-income property, and what is the demand for rental units in each of those categories? You also need to evaluate whether there is an actual demand for rental at the rental rate needed to pay the carry."

Once you locate a prospective property, get ready to do some serious homework, says Lee. Closely analyze the property for physical condition, historical operating information and practicality of the units fulfilling the desired objectives. Scrutinize the surrounding marketplace for average comparable rental rates and occupancy, determine trends in the immediate neighborhood and take stock of the economic stability of the area.

Additionally, Demoff adds, while conducting your due diligence be prepared to incur a variety of expenses - including the hiring of a property-inspection service and professional appraiser (required by your lender).

"Also, you should determine whether or not you are capable of maintaining the property by yourself," says Daniels. "If you are not, you should begin establishing a network of maintenance people or retain a property manager to oversee the operation and maintenance of the property."

Demoff feels that this is a very personal choice. "If you don't want to deal with tenants but have no issue demanding service from your managers, then I would say you are wise to pay for this service."

One of the big "don'ts" Daniels cautions against when pondering a rental-property purchase is not to fall in love with the property. "As long as the purchase is strictly a rental investment and not a long-term investment with the idea of ultimately living in the property, then the property is merely an asset. A less attractive property in a less affluent neighborhood may generate more net income than a more attractive property in a more upscale neighborhood."

Another "don't" is to assume that all property is capable of being rented, Daniels says.

"In today's market, there are many condominium units and single-family homes that were purchased by investors intending to either 'flip' the units or otherwise rent out all their units," he says. "When the resale market nose-dived, there was a glut of empty units and rental rates dropped dramatically, thereby affecting the investor's ability to generate enough income to meet their debt obligations."

Before you submit an offer on a residential rental property, talk to a tax adviser about the tax consequences of your investment, and get an attorney to review all contracts and agreements. Prior to shopping for lenders to finance your loan, aim to improve your credit rating. Don't be surprised to learn that lenders often require larger down payments, higher interest rates and stronger finances when you're purchasing rental property. Compare several different lenders, as well as the total costs of the loan carefully.

When you're ready to make an offer, base your bid on prices for similar rental units/buildings in the area, which can be obtained from a local real estate agent. Bear in mind that if you overpay for a rental property, it's extremely difficult to recoup the money you could have saved if you pushed for a better bargain. © CTW Features