Buying real estate for the purpose of renting to tenants and generating extra income can be lucrative—provided you estimate your costs accurately and invest in the right properties. Steps to take:

Scout locations.
Walk the streets in target neighborhoods and talk to local residents. Ask about area changes, the crime rate, parking, flooding, and street traffic and noise. Also visit city hall to see what public works, utility upgrades and park projects are planned.

Do the math.
Figure out whether the going rents for similar space in your target market will cover your expenses and leave room for profit. Subtract annual mortgage payments and operating expenses.

Factor in taxes.
Rent revenue after expenses will be taxed as ordinary income. While you can depreciate residential rental property, you can’t depreciate the land it stands on because land doesn’t wear out. Consult a tax attorney for qualified tax breaks and any local tax incentives.

Screen your tenants.
Before accepting prospective renters, conduct a background check of their credit and criminal histories (www.choicepoint.com offers this service online).

Set clear terms.
Your lease should spell out residential rules, when payments are due and the penalty for late payments or failure to pay. Find boilerplate leases and other landlord resources at www.lawdepot.com and at www.landlord411.com.