Question: I am a beginner in real-estate investing, although I would rate my knowledge of the market I am interested in as advanced. I own my home and have built substantial equity. Though I don't need another home, I would like rental income for tax advantages and potential returns, and I am motivated to enter the real-estate "game." Is acquiring another piece of property or condo using cash from my home equity as a down payment a good idea?

-- Haney, Los Angeles

Haney: That depends on your view of where house prices and rents are heading.

The median single-family home price in Los Angeles has shot up 30% over the past year to $438,400, according to the National Association of Realtors. Since 2001, the median price is up 82%. That kind of momentum can't continue indefinitely. Some economists think prices are likely to level off or even fall in the next few years, though housing prices are notoriously hard to predict. In any case, this probably isn't the ideal time to increase your investment in Los Angeles real estate. You should consider whether you want to diversify your investments rather than becoming overly reliant on one type of asset.

On the other hand, Los Angeles seems to have a pretty healthy rental market. The vacancy rate for buildings with 20 or more rental units in Los Angeles was 3.4% in this year's second quarter, according to Reis Inc., a research firm that tracks rental data nationwide. That's up from 2.1% in the second half of 2000, but a 3.4% vacancy rate means the availability of units for rent is still "very tight," says Andrew M. Wright, a senior consultant at Reis.

(On a national basis, the situation for apartment owners isn't so strong. Though supplies are tight in Los Angeles, New York and Washington, D.C., Mr. Wright says, some other cities have huge surpluses of empty units. The national vacancy rate in this year's second quarter was 6.8%, according to Reis. Mr. Wright says that a vacancy rate of 4% to 6% is healthy.)

If interest rates rise sharply, fewer people will be able to afford houses and more will have to rent. Of course, higher interest rates also could hurt the resale value of your property, at least in the short term.

Your knowledge of the local market will be crucial. You might do well if you can buy a rental home at a reasonable price in an up-and-coming neighborhood, and if the quality of the home will compare favorably with other rental units in your area.

One more bit of advice for aspiring landlords: Don't assume renters will share your taste in décor; before investing in a property, ask a few real-estate agents what kinds of amenities attract tenants.

-- Mr. Hagerty is a staff reporter for The Wall Street Journal. His "House Talk" column appears most Fridays on RealEstateJournal.com. E-mail him your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city. Due to volume of mail received, we regret that we cannot answer every question.

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