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Now might be a good time to buy rental property. 

Foreclosures are going to be up which means there may be some good buys on homes that could easily be fixed up at a reasonable cost.  Most lenders are not going to want to keep them long so you can get them at liquidation values.

Second as lenders become more stringent on credit there will be more people looking for rental housing.  This should mean rents may go up a bit.  This is already happening in the Twin Cities.  My son lives there and says that rentals are being gobbled up very quickly.

Third the real estate market will not stay soft forever.  It may take a few years for things to turn around, and don't expect the same crazy price increases of the past, but if you can get into a house at a liquidation value, pay for the majority of the costs through rent, then after  three to four years it might be possible to sell the house for a nice profit.  The key is to buy a property in an area with a good history for primary housing.

So how do I know if the property might be a good rental?  We look at the Gross Rent Multiplier as one indicator.  The Gross Rent Multiplier is a market derived indicator of value.  If a typical house sells for $100,000 and it gets $1,000 a month rent then the Gross Rent Multiplier would be 100.   This should be indicative of all similar houses that are rented in that area.  A GRM is usually derived from numerous sales of rentals. 

An appraiser should be able to give you the GRM for a particular neighborhood and style of house.  So then let's say the GRM for a neighborhood is 125.  You are looking at purchasing a house as a rental that you can get $750 a month rent based upon market data.  The projected market value as an income producing property would be $750 X 125 or $93750.  What this means is that if you can get the home cheaper than $93750 it may make sense to buy.

Typically good rental property will be older homes.  And remember there is going to be a cap on market rents.  Some areas will not command above a certain rent.  So do your homework.  Best of all hire an appraiser to help you sort things out.