Become a Rich Landlord in 7 Simple Steps

Last Updated Jun 7, 2011 7:09 PM EDT

If you've got some cash languishing in a bank account, it may be time to think about putting it to work by buying properties and renting them out.

Home prices have fallen to multi-year lows, and can be as much as 60% below peak prices. Combine those apparent bargain-basement prices with low fixed-rate financing and the potential returns from becoming a landlord by buying rental properties starts to look mouthwatering.

Consider real estate web site Trulia's recent analysis of renting vs buying, which found that it would be cheaper to buy than rent in about 80% of major cities. Using their figures, you'd find that rents on a two-bedroom unit in Phoenix go for as much as $1,000 a month, but it would cost less than $100,000 to purchase the same unit.

Assuming you put $30,000 down and got a loan for the remaining $70,000 at 5.5%, your monthly mortgage payment amounts to a paltry $397. Add in $100 a month for property taxes, another $100 for insurance and utility costs, and another $100 for maintenance and repairs, and you're still collecting $300 more per month than you spend.

Your average annual return? 12% on the $30,000 in invested capital. Better yet, the renter is paying off the mortgage. If the home appreciates from here, you're really in the gravy. Let's say, for example, that home prices rise a mere 2% on average over the next 30 years. Your home will be worth $181,000 when the mortgage is paid off. Because the rent has more than covered the cost of the loan, your only cost is still the $30,000 you put in. Net profit (not including the income you've received each year): Roughly 500%.

That said, it can be tricky to find the right property and make the numbers pencil out, says Christine Karpinski, author of How to Rent Vacation Properties by Owner.

Here's how you do it, step by step.

Go to Step One: Determine rental type

Comments