If you're cut out for it, life as a landlord can be quite profitable. But success isn't assured. Here's what you need to know before diving in.

The idea of owning rental real estate seems to be gaining popularity as investors tire of the swoops and swoons of the stock market. 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.

Develop a network

Experienced landlords find their properties in a variety of ways. Some hunt for foreclosures, making friends with city hall clerks or bank employees who know which properties are about to be sold. Some run ads in local newspapers. Others work with real estate agents who keep their eyes peeled for possible buys.

Several landlords recommended joining a local landlord or property owner's association to make contacts. Callahan's Web site offers links to local groups, as does the National Real Estate Investors Association.

"When you begin to own rentals, all the other investors start coming out of the woodwork," said Sean Hoppe, a landlord in Pottsville, Pa., who owns 11 properties. "Through investor meetings, networking, etc., I can find out what is for sale."

You also can try approaching landlords directly to see if they're willing to sell, by calling the numbers listed on rental ads in the classifieds, by cruising neighborhoods looking for "for rent" signs or by talking to any landlords you know personally.

That's how Bob, who asked that his last name not be used, bought his rental property near Albany, N.Y. The landlord of the three-unit building where Bob had rented for 15 years was tired of the hassles and ready to sell.

"We love (the area) and jumped at the chance to buy it," Bob said.

So far, Bob and his wife have been pleased with their purchase. They raised rents and required security deposits, which caused the property's less desirable tenants to leave. He also has a backup plan for the building in case he starts to feel like the prior owner.

"If being a landlord got to be too big a hassle," Bob said, "we would just get rid of the tenants and make it our own place."

Get your finances in shape

The better your credit, and the less credit card and other consumer debt you have, the better your prospects for getting a decent loan, Callahan said. Lenders usually require bigger down payments, higher interest rates and generally stronger finances when you're buying rental property. That's because they know people are more likely to default on investment property than they are on their own homes.

Landlords say it also pays to have a substantial cash reserve left over after buying a property.

Today’s reverse mortgage programs contain numerous safety features to reassure seniors that they retain their rights as the homeowner, and they cannot put themselves, their home, or their family at any financial risk. These protections are mandated by law for the FHA HECM and by Best Practice for conventional programs.

Below is a listing of the most important consumer safeguards:


1) Independent Counseling

Before a reverse mortgage application can be processed, the prospective borrower must first meet with an independent counselor. HUD oversees a network of counselors whose job is to review the transaction, answer questions, and suggest alternative options.


2) Standard & Capped Interest Rates

FHA HECM: You can choose either a fixed interest rate or a rate that adjusts monthly or annually (the borrower chooses). Rates are calculated on one of two indexes--the 1-year U.S. Treasury Constant Maturity Rate published weekly by the Federal Reserve, or the London Interbank Offered Rate (LIBOR)--plus a margin charged by the lender. Both the monthly and annually adjusted rates have lifetime caps.

Conventional reverse mortgages. Most conventional programs are based on the LIBOR index, plus a margin charged by the lender.


3) Limitation on Fees

Origination fees are capped and may be financed as part of the reverse mortgage. This means a senior incurs very little out-of-pocket expense to get a reverse mortgage.


4) Advance Disclosure

Under the FHA HECM program, the Total Annual Loan Cost, or “TALC” disclosure, required by the Federal Reserve Board, is provided to the prospective reverse mortgage borrower and displays the total transaction costs over the projected life of the loan. This way, a senior is made fully aware of the costs incurred in obtaining the reverse mortgage.


5) No Maturity Date

A reverse mortgage cannot become due during the homeowner’s lifetime. It is a permanent tool. The fact that there are no required payments and there is a lifetime right to occupy the home provides great protection against unforeseen or unanticipated future circumstances, rendering reverse mortgages vastly safer than other loan alternatives.


6) No Prepayment Penalty

FHA HECM, although the loan is not due and payable until the senior permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.

Conventional reverse mortgages. Some programs will charge a prepayment penalty if you try to pay off the loan within the first year.


7) No Penalty for Canceling the Loan

After the loan closes, you have up to three days to cancel the transaction, the so-called “right of rescission,” for any reason whatsoever.


8) Asset Protection

The reverse mortgage is a “non-recourse” loan. This means that the amount due can never exceed what the home is worth. Title to the home always remains with the borrower. When the loan becomes due, the lender is repaid the sum of funds advanced plus the accrued interest, but never more than the value of the house. If there is remaining value, it belongs to the homeowner or the estate.


9) No Shared Appreciation

No reverse mortgage product in the marketplace has “equity-sharing” or “shared appreciation” features. In some earlier reverse mortgage products, the senior could obtain more money in exchange for giving up a percentage of the future value of the home. Such products are no longer offered.