Ever dream about passive income, living solely off of the monthly returns on  your investments? I do. Where do you start, trying to go from wage slave to tanning on a beach and collecting?  

Cash flow, and particularly creating the most cash flow from the fewest properties. Landlords are easy targets for lawsuits (see Landlord Legal Guide: How to Protect Your Rental Property Assets) so every rental property in your portfolio is a legal liability. 

The simplest (though not the easiest) way to do this is to buy investment properties with cash, and only have to pay taxes and insurance on them. Not likely for most of us, but the wisest way to invest nonetheless.  

When choosing a rental, look for neighborhoods with a better market rents than market sales prices. Try to spend no more than 60-70 times market rent when buying, if at all possible. Granted, market forces will adjust these eventually, but you might look at these types of neighborhoods first:
-college towns (get a double security deposit, because you'll need it)
-immigrant strongholds (better population growth)
-gentrifying neighborhoods (be in early!).  

Consider multi-unit properties as well, because they tend to create the best cash flow. Watch out for the following pitfalls though: zoning can be a nightmare, and never assume you can change it. Look for the number of utility meters in the basement, because that usually indicates the number of units. They also usually cost more to buy and to renovate, so make sure you have extra capital available.  

Minimizing your expenses is a must, and one way to do it is to amortize your mortgage for thirty years. Still, consider paying extra principal every month to chop out some of the up-front interest. Imagine paying off the properties within 5-10 years, and sitting on in a cabana sipping pina coladas, and pay some of that extra principal early.  

If you only take one concept away from this article, remember this: STAY CAPITALIZED. Keep a hefty account for unexpected expenses and emergencies, because they will pop up. Vacancies happen, sometimes for six months at a time, and sometimes you'll have a lot of vacancies at the same time. Sometimes you'll be hit with huge repair bills, and sometimes you'll have to deal with litigation and you’ll need cash, and lots of it.  

Don't give up on the dream of passive income, and remember that fewer properties=fewer headaches. Consider selling some to pay off the others, as an alternative to leverage. For some colorful examples of why you don't want too many properties, check out this hilarious humor blog: Diary of a Slumlord: A Lighter Look at the Darker Side of Real Estate. 

For more helpful reads and resources for landlords, try the following database of landlord articles and real estate forms, and of course there's plenty of great tips right here on Work.com. Good luck, real estate can be fun, you just have to make it so.  

Real Estate Investment Strategies - Part I - Short Term Investment

Real Estate Investment Strategies - Part II - Long Term Investment