(© Inti St Clair/Photodisc Red)

Owning rental property seems like an easy way to generate extra income. But it's actually not all that easy.

Nevertheless, the number of people buying second or third properties as investments has grown tremendously, according to the National Association of Realtors. In fact, the group's recent survey found that 36% of home sales in 2006 were second homes and 35% of current investment-property owners plan to buy another property in the next two years. Since 46% of those questioned by NAR said they bought the investment property for the rental income, it behooves landlords to be scrupulous in searching for good tenants.

Landlords who take shortcuts when screening potential tenants, who skimp on insuring the property or who fail to outline everything in a detailed, written lease can end up with unpleasant and, yes, costly surprises. But there is one shortcut neophyte landlords can take: They can listen to the pros so they won't have to learn lessons the hard, expensive way.

Do your own due diligence: A case study
Take, for instance, the tenant who so looked good on paper, with his attractive credit report and handsome deposit check. Too bad the paper he looked good on was bogus.

Apparently, this seemingly perfect tenant doctored his credit report, giving himself a stellar rating. Then the guy bounced his hefty $4,000 deposit check. Pasadena, Calif., landlord Payman Emamian blames his real-estate partner for renting to this con man. Not only were they out money, but the lying tenant damaged the investors' two luxury Hollywood town houses. (The guy claimed he'd work in one and live in the other.)

After three months, Emamian successfully evicted the man, but not before he ran up a $20,000 tab for back rent, legal fees and repairs.

What's your home worth?

Emamian's advice to landlords: "Never accept a credit report that a tenant brings you."

Emamian, who bought his first rental property -- a four-unit building -- in 1998, says he's learned to double-check everything. To help landlords dig into backgrounds, companies such as the National Association of Independent Landlords, of Houston, provide credit reports and scores for $15.95 each. Landlords must first get the applicant's permission, signature and Social Security number, plus they must provide their own proof of real-state ownership, photo identification and credit-card number for payment. NAIL also provides a host of other background checks, including a nationwide criminal search for $12.95 and a national eviction search for $5.95. Many landlords charge prospective tenants an application fee to cover the costs of screening.

Emamian doesn't stop at second-guessing tenants. He applies the same level of scrutiny to information provided by sellers when he's scouting a potential rental property. "Never listen to sellers as to what the expenses are," Emamian says. "You research."

Most buyers know they need to foot the bill for taxes, insurance and some maintenance, but many don't factor in utilities, landscaping, private trash collection or the loss of income when the unit is vacant.

Check references
As for screening tenants, Emamian always asks for two landlord references. The past, not the current, landlord is the most important reference because the present landlord may fudge the truth to get rid of a terrible tenant. Also, the landlord can either pay an outfit like NAIL to question present and previous landlords and employers or do it himself. Emamian also asks for a copy of a bank statement.

"I want to make sure they have assets -- how is that check going to clear?" says Emamian.

Jim McDavid has survived 40 years as an owner, manager and seller of rental property by doing very thorough due diligence, and basically by doubting everything prospective tenants tell him. In fact, McDavid says he gets a police report on applicants and asks for photo identification as an extra precaution. Although procedures vary from state to state, McDavid says in Virginia he simply walked into the sheriff's department and paid a small fee for the criminal background check.

"I've owned just about everything in the book," McDavid says. "I owned condos in Florida and houses in Charlotte (N.C.)." McDavid, a licensed real-estate broker in his home state of South Carolina, as well as in North Carolina and Virginia, says, "Everything changed on 9/11, even in real estate."

Buy adequate insurance
Protecting yourself goes beyond combing through a tenant's background. McDavid says that too often landlords skimp on a very important item: insurance.

"Tenants create all possible situations you can imagine," he says. McDavid tells of a young woman who rented from a client. The woman's boyfriend slipped her two illegal drugs -- Ecstasy and methamphetamine. Her family is suing the boyfriend, the lender on the property and the owner of the town house.

"Protect yourself against the impossible," McDavid says of insuring rental property. "You need as much (coverage) as you have on your automobile driving around." Also, most experts recommend requiring tenants to have renters insurance. The owner's coverage repairs and replaces only the actual structure and many times the appliances, but not the tenant's belongings.

Another form of protection is proof of a property's condition. McDavid suggests having a written, signed document with photos of the property when the tenant moves in.

"Establish a baseline," he says.