According to Arzaga, when you ask buyers what they want from their rental property, they'll say they want it to provide for their retirement, and that's not necessarily going to happen, at least not from residential real estate, he says. Not only doesn't it spit off a lot of cash, but people forget to take into account a lot of the hidden costs, like utilities, maintenance, property management and landscaping, which can cost thousands of dollars each year. Or they fail to account for the capital improvements that will be needed, which can cost $50,000 to $60,000 over ten years ­whether it's a new roof or furnace. "When you do the analysis, it gets to be a real low return," Arzaga says.

Kreditor suggests that people who buy real estate make sure they're not paying more than fifty times the monthly rental income, as a rule of thumb. He says some people estimate the cost of repairs and loss of rental income at 5% of the yearly revenue, but he puts that figure at closer to 50%.

In fact, those who have used conservative estimates appear to have flourished. Amir Korangy has been buying and selling properties in New York City for years, and he's always made sure that the building could carry itself, even if half of the units were vacant. He was working for Yahoo! making $48,000 a year when he made his first purchase: a property in Brooklyn that he bought for $210,000 and sold ten months later for $400,000.

Happy with his returns, he left his job and continued to purchase properties in the Brooklyn neighborhoods of Prospect Heights and Crown Heights because they were underpriced yet had good access to transportation into Manhattan and could be easily rented out. Over the course of 26 months, he bought and sold 11 properties, some of which he'd keep for as little as a month. He purchased one property, a Crown Heights townhouse, for $280,000. He spent $55,000 on renovations, and then sold it eight months later for $880,000. He has since expanded into Washington, D.C., and Boston, which have strong rental markets.

"I've thought the market was going to turn for some time, so whatever I purchased in the last couple of years, if the proceeds didn't work out to what I needed it to, I wouldn't buy it," Korangy says.

Now 35, Korangy owns five properties-between his personal holdings and that of his company-one of which is his own loft. He also launched a real estate magazine called The Real Deal because he found there was such a dearth of good information out there about the market.

But even Korangy's deals weren't without problems. He once purchased a house because it was on a beautiful tree-lined street, and two months after he moved in, city officials came by and cut them all down saying they'd been eaten by Japanese beetles.
He once bought a townhouse for $675,000 planning to turn it around and sell it to a buyer for $1.1 million, only the buyer backed out, and he had to sell it for less than he'd planned.

Arzaga prefers commercial real estate because he says the fundamentals are much better. "It usually has a higher monthly cash flow, better tax benefits because you can depreciate for a longer period of time, you can get better leverage on the financing, and the capital appreciation relies more on the property's cash flow than supply and demand in the market."

Alan Brachfeld, CEO of KBK Wealth Management in New York City, says those dabbling in real estate should make sure they have a cash reserve equal to six months to a year worth of expenses in case they can't rent it or a tenant leaves. "You don't want to be in a situation where you're strapped to pay the mortgage," says Brachfeld, a CPA and CFP. "If it costs them $5,000 to run the property, they should have a minimum of $60,000 in short-term liquid money."

It doesn't hurt to live near the property. If a tenant calls with a plumbing problem, you don't want to have to be driving three hours to look at it, Brachfeld says.