In some ways, long term real estate investment is easier than its myopic counterpart, since landlords can avoid periodic spikes and dips in the real estate market. Long term investors can recuperate expenses over a few years, while the property appreciates in value, if their initial costs run over budget.

Of course, there are still plenty of snares and catches for landlords and other long term investors. Litigation is a greater risk, since their exposure lasts longer, and tenants are always happy to find an excuse to sue their landlords (see Landlord Legal - How to Protect Your Real Estate Assets). Maintaining  positive cash flow is another issue, but one we’ll explore more thoroughly in the third installment of this series. Last but not least, speculation and prediction of real estate market trends can be a double-edged sword, and you had better believe that plenty of smart investors have lost on their investments when a new highway through the backyard is announced or a crime spree depresses a neighborhood.

With all of those risks, where does one even start to evaluate investment properties for long term potential?

First of all, decide what your risk tolerance is. Investors who prefer low returns with low risk should stick to stable, middle class neighborhoods with little fluctuation in pricing. Those investors less averse to risk might consider low-end neighborhoods with the potential to appreciate quickly, but can also breed crime and sometimes only worsen over time (check out Diary of A Slumlord: Landlord Tips, Tricks, Rants, and Rage for a humorous and mildly offensive account of low end investing).

If you’re considering the safer route, examine the school systems of the neighborhoods you look at, because they're usually a good indicator of the health of the community. Also take a close look at the stability of the job market in that area, and the age demographics (families=stability). Most parents would much rather put their children in a good school than live eighteen minutes closer to their office, and families are far more stable than young professionals.

If speculation on low end real estate is your game, keep in mind that you're trying to predict future market trends, which can be tricky. When low end neighborhoods do turn the corner, the first  in are the young professionals who are less worried about crime than parents. They like nightlife like bars and restaurants, they want lots of artistic institutions like galleries and museums, they like to be close to water (bays, rivers, harbors, etc.), they enjoy sports stadiums, and subways and metro stations are a plus (avoid bus stops though). Speculators should watch municipal plans to add any of these attractions to a given neighborhood, but beware: there are plenty of others listening just as closely, so sometimes it's the second mouse that gets the cheese.

A last word for speculators: be careful of over-improvement. The slum you’re watching may well become something more eventually, but between now and then, you still have to rent to low income people. They can’t afford extra rent for mahogany hardwood floors, so wait until the yuppies move in before spending extra money.

There is much to be said about being a landlord, so investors are well advised to read up on the subject. Take a look at some of the following: How to Screen Tenants - A Landlord's Guide, and Landlord Articles for First Time Investing.

The good news: real estate does tend to appreciate over time, and if you have the patience (and the money) to wait it out, you can earn an excellent return.

Real Estate Investment Strategies - Part I - Short Term Investment

Real Estate Investment Strategies - Part III - Cash Flow