Where to Get the Most Rental Income for the Least Investment

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The condo fee is $465 a month, and the taxes are $150 a month. The buyer is hoping to rent it out for $1,600, which should cover the costs, McCreary said.

Prices have fallen enough that it has become somewhat easier to find condos in nice urban areas that make sense as rentals, she said. "A year or two ago, it was really impossible because the rental market was going down, and the sales market was skyrocketing," McCreary said. "The two are coming together a little bit now."

Motown Bargains

It's much easier to make the rental equation work in Detroit, where the economy along with the auto industry is in terrible shape. Median prices dropped more than 50% from a year earlier, to $42,500, but sales rose by nearly a third as cash-ready bargain hunters jumped in. In the city itself, the median price has fallen to $5,800—much less than it costs to buy a new car produced in the Motor City.

Out-of-town investors are coming in to take advantage of the low prices. Jeremy Burgess, a former baker at a Safeway supermarket, and his partners have made a business of finding investments for buyers who don't know the ins and outs of the risky market.

Burgess, manager of Urban Detroit Wholesalers, said he has found about 100 houses for investors, who mostly are from outside the state. He says the company looks for three-bedroom apartments that cost about $30,000 including all rehab costs. A cash buyer can make at least $200 a month after all the costs, including property management fees, Burgess figures.

"The good thing is it's a low buy-in," said Burgess, who acknowledges that the Detroit market has risks. "Not everybody has the attitude to do this: You have to have a pioneering spirit."

But Ron Johnsey, president of Axiometrics, a Dallas apartment research firm, said the problem with markets like Detroit is that it's not easy to see how or when a recovery might occur. And it's difficult to find a good exit strategy, because it might not be easy in a few years to find a buyer, he added.

A Coming Shortage

Johnsey says that it will pay to wait a year or more before investing in any market. Rising unemployment will cause rents to drop and vacancies to rise at least through the end of 2010, he said.

But when the job market recovers, the upside for investors will be huge, Johnsey said. New construction of apartments and single-family houses have slowed so dramatically in many places that there will be a shortage of properties in a few years, he said. And demand will increase as many unemployed Americans in their 20s and 30s suddenly will be searching for their own digs, he said.

"There are some great buys out there in the apartment market," Johnsey said. "But not as many as there will be coming down the pike. We're just at the tip of the iceberg."

Nadji agrees that things will get worse before they get better. But he said it's impossible to time the bottom and it makes sense to get in before interest rates rise and big institutional investors jump in and drive up prices.

"Once there's a little more confidence in the economy, with this strategy of waiting, you might miss an opportunity," Nadji said.

Click here to see the 20 U.S. real estate markets that offer the best rental returns for investors looking to get into the rental property business.

Gopal writes about real estate for BusinessWeek in New York.

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