Location is often described as the most important thing in real estate. It's said to be the second and third most important things, too. But in the rental housing market, finding a high-quality tenant trumps location every time.

"The essence of an investment in real estate is a good tenant," says James McClelland of the Mack Cos., perhaps the largest owner-manager of single-family rental properties in the Midwest. "A good tenant in a bad location is better than a bad tenant in a good location."

The trouble is, most novice landlords -- and even some experienced ones -- don't do the legwork necessary to land a top-notch tenant who will pay his rent on time and take care of the place, hopefully as if it were his own. And that's when landlords get burned.

Nearly 60 percent of the landlords and property managers polled recently by LeaseRunner, an online leasing company, identified "finding the right tenant" as the most challenging aspect of rental real estate.

Perhaps the only thing more difficult than putting in a good tenant is getting out a bad tenant. But if you hold out for a sound one, you won't have to go through the costly, time-consuming eviction process.

McClelland, whose company manages about 570 single-family rentals, including 200 owned by others, maintains there are plenty of good tenants looking to rent a nice house. "You may have to go through a bunch of (prospects) to find one," he says, "but it's worth it."

So, whether you are an "accidental" landlord who has no choice but to rent your house or an investor looking to cash in on what is expected to be a booming single-family rental sector, here's how Mack Cos. goes about it:

For starters, personally meet your prospects at your property to show them around, answer their questions and ask a few of your own.

There's no hard rule about appearances. A guy with a bunch of tattoos who shows up on a Harley could just as easily be Mr. Right -- as long as the bike isn't too loud -- as a seemingly clean-cut guy who arrives in a Prius. But if he or she doesn't seem to give a hoot about personal hygiene, chances are they won't take any better care of your house than they do of themselves.

Don't discriminate because of race, color, religion, sex or national origin. Still, if you get a bad vibe about the person, or if something doesn't seem right, go on to the next one.

You also have to ask the right questions. Most novice landlords ask about such things as hometowns and high schools, McClelland says. "They just want to see if they like the person, without any understanding of their financial capabilities."

It's better to purchase a standard rental application form at the local stationery or office supply store and have your prospect fill it out completely. Most important, you'll want to know how long they have lived at their current address, how much rent they pay, where they work and how much they earn. Also ask why the person is leaving. It could be that he is being evicted, but it also could be that he has no choice. Maybe the owner is selling the place or wants to rent to a relative.

Now verify everything. Start by interviewing the current landlord on the phone. How much is the rent? How long has the potential tenant lived there? Did he take care of the place? Any problems?

Yes, you want to make sure everything matches up. But during the course of your conversation, you want to listen for something on the order of, "I'm sorry So-and-So is leaving," or, "He was really a good tenant; I hate to lose him."

Also call the prospect's employer to verify his employment. Mack Cos. looks for people with three years' tenure at their current workplace. "You want to make sure they are stable, not job-jumping," McClelland says.

Next, pull a credit report on the prospect and run criminal background and "skip-trace" checks. If you don't have an account with a credit reporting agency or tenant screening service, ask your real estate agent to perform these services on your behalf.

You can charge the prospect a fee for this. In fact, doing so often weeds out the bad apples who don't want to pay because they know what the results will be. But you can't use the credit report as a profit center.

Here, you are looking at how prospects pay their bills. If they are late or don't pay at all, chances are they are going to treat the rent payment the same way. "A landlord needs his rent on time because he has to make his mortgage payment on time," McClelland says.

McClelland's staff also visits prospects at their current residences to get an idea of how they maintain their homes. "How they take care of their current property is indicative of how they will take care of yours," he explains.

If the would-be tenant does not meet your standards, you can deny the lease or ask for a co-signer, a larger security deposit or even a higher rent. But if you take any of these "adverse" actions based on a credit report or a report from a tenant-screening service, you are required by law to give the prospect the name, address and phone number of the agency that supplied the report.

Following these steps will help protect your investment, but the work doesn't stop there. Now you have to manage the property.

There's more to it than just collecting rent, of course. A great way to make sure your rental house is being taken care of is to go to the place in person every month to pick up the check. That way, you can look around to see for yourself that the house is in the same condition it was when the tenant moved in.

McClelland concedes that this takes time. "But you know what takes more time?" he says. "Making costly repairs to the property because you haven't checked on the tenant in months, then finding out the property was poorly maintained."

Lost in the euphoria over record low rates for 30- and 15-year fixed-rate mortgages is perhaps an even better alternative: adjustable mortgages.

Adjustable-rate mortgages get a bad rap, lumped as they often are in the "toxic" category with such infamous products as interest-only loans, negative amortization and no income, no asset mortgages.

But today's most popular ARMs -- called "hybrid" ARMs because they carry fixed rates for the first five or seven years, after which their rates begin adjusting annually -- are excellent deals for the proverbial "right" borrower.

That would be someone who knows he is going to move on -- either buy another house or refinance the current one -- before the fixed-rate portion of the ARM runs out. But as we'll see in a moment, the time frame until you are in the red with a hybrid ARM is actually somewhat longer.

According to mortgage intermediary Freddie Mac, the average for 30-year, fixed-rate mortgages in early June was a record low 3.75 percent. The following week, the average fell even more, to 3.67 percent. The rate for a typical 15-year loan was an astounding 2.9 percent. The 5/1 ARM was a tad cheaper at 2.8 percent.

But forget those rates. While they grabbed all the headlines, they aren't terribly realistic, because they are an average of what the "ideal" borrower would have to pay. And as everyone knows, ideal borrowers are few and far between.

So here's an analysis based on rates that lenders were actually quoting in early June on LendingTree, the online service where lenders bid for your business. It's based on an average of the offers quoted by lenders on $225,000 mortgages to borrowers with a 20 percent down payment and a FICO score of 720:

On a 30-year fixed loan, the typical LendingTree rate was 3.91 percent, resulting in a monthly principal and interest payment of $1,063. The 5/1 ARM was pegged at 2.75 percent, with a payment of $919.

As a result, the ARM borrower would pay $144 less each month for the first five years of the loan, for a total savings of $8,640.

So far, so good. But what happens when the adjustment period kicks in?

In the worst possible case, you wouldn't start losing money with the ARM in this example for more than seven years -- 91.4 months, to be exact. The reason: Adjustables come with protective annual and life-of-the-loan interest rate caps that typically limit adjustments to no more than 2 percentage points annually and no more than 6 points over the duration of the loan.

Consequently, in our example, under the worst of circumstances, the adjustable rate in year six would jump to 4.75 percent, while the fixed-rate would remain at 3.91 percent.

That means the payment from month 61 through month 72 would be $72 higher for the ARM -- $1,135 vs. $1,063. Over the 12-month period, you pay out $864 more for the ARM. But you'd still be ahead $7,776 because of the $8,640 you didn't have to pay in years one through five.

In year seven, the ARM rate might jump again, to as high as 6.75 percent, in which case your payment would rise to $1,368. In such a worst-case scenario, that's $305 more a month than the payment on the fixed loan.

But again, while you pay more, you're still ahead. Indeed, by the end of the loan's seventh year, your total payments with the ARM are $4,974 less than they would have been with the fixed loan.

Even if rates jump two more points in year eight, hitting 8.75 percent and the 6-point maximum, you wouldn't be a loser with this loan until the 91st month. At that point your payment will be $1,614, or $551 a month more than the payment on the fixed loan, and you've lost everything you saved.

Is this loan for you? If you are certain you are going to move within the first five years, absolutely. This kind of savings just can't be ignored, and there is no risk whatsoever. If you can afford the annual hits, you still have more than seven years to move or refinance before you lose money by not taking the fixed-rate loan.

So the ARM should rate at least a second look. Even with fixed rates at record low levels, says LendingTree's Doug Lebda, ARMs can be a "valuable risk-adjusted alternative."

A few more points to consider:

-- Only you know how long you are going to stay put. But according to the Census Bureau, Americans move or refinance every six or seven years on average. Are you the typical itinerant homeowner, or is this house where you plan to raise your kids and live until Middle Youth sets in?

-- Rates go down as well as up. That means there's always the possibility that once your rate tops out at the 6-point cap, it could drop again. The rate could recede even before it hits the maximum. Or it may never, ever go down.

Betting on interest rate movements is always a crapshoot. But with rates today as low as they are, the safe gamble is that they will rise from here. How high and for how long is anyone's guess. So if you have a low tolerance for this sort of thing, your timeline with a five-year ARM is exactly that, five years.

-- You'll receive a smaller tax break on the ARM because you'll pay less interest, at least initially. But mortgage interest is a costly out-of-pocket expense.

Moreover, the tax deduction is not a dollar-for-dollar writeoff. Rather, it is based on your tax bracket. So, if you are in the 18 percent bracket, you'll be able to claim only 18 cents for every dollar you spend in mortgage interest.

Under new guidelines set down by Fannie Mae and Freddie Mac, underwater borrowers who are seeking to sell their homes for less than what they owe must now receive decisions from their lenders within 60 business days. But if they are not careful, floundering borrowers can cause delays beyond the two-month deadline.

The new rules, which take effect June 15, apply only to loans owned or rolled into securities by Fannie and Freddie. But because the two mortgage giants are the main conduits between primary lenders and investors in mortgages, their precepts cut a wide swath.

More than 10 million homeowners are said to be underwater with their mortgages. Not all want to get out. Many are content with their current situations and have no intention of moving, at least for now. Others continue to hold on in hopes that values will start rising again.

Unfortunately, others need to go, and many of them would rather sell at a loss through a short sale -- a loss their lenders would have to absorb -- than have their homes taken away.

The new 60-day rule became necessary because lenders were taking an inordinate amount of time to make up their minds -- eight months on average at one point, according to RealtyTrac, a foreclosure data firm. It took so long to receive an answer that many would-be buyers became tired of waiting for a decision and went elsewhere.

But borrowers need to realize that the rules cut both ways. While lenders are required to adhere to faster timelines, borrowers also must do their part. Otherwise, they can short-circuit their own short sale.

A decision can be delayed, for example, if all the paperwork the lender requires has not been supplied. If something as simple as a photocopy of a driver's license is missing, a borrower might have to start the process over, says Steven Horne of Wingspan Portfolio Advisors, a firm that services nonperforming loans.

Consequently, Horne and others agree that the most important thing a borrower can do is engage the services of a real estate professional or attorney who has experience in short sales, preferably with their particular lender. Not to bash rookies, but now is not the time to allow someone to cut his or her teeth on a deal.

"The way short sales are packaged and presented by real estate agents is more than half the battle," says Ed Delgado of WREN, the Wingspan affiliate that trains agents on how to package their short sales to speed up the process and gain approvals. "The more agents understand about how the process works, the fewer the delays and the faster the closings."

Matthew Vernon of Bank of America, which maintains a roster of experienced agents on its website (agentlocator.bankofamerica.com), agrees. "We get agents who are still learning the short-sale business, and that's never a good thing."

One good reason to have an agent who has a working familiarity with short sales is that, unlike a regular sale, the short sale is basically a two-step process. It's important to understand which step comes first.

Some lenders work the traditional way: Find a buyer, bring us the deal and we'll make a decision. But other lenders want borrowers to approach them first, come to an agreement on an acceptable price, and then find buyers at that figure.

"With some lenders, you can't just randomly list your house," Delgado says. The short sale can still be done, he says, but the timeline for closing is longer. "Usually people blame the lender for that, but often it's their own doing."

Complete and accurate financial information is critical, and the quicker a borrower completes the requested paperwork, the faster action can be taken.

It goes without saying that all forms should be filled out legibly, preferably typed. Pages get faxed back and forth several times, so if something is handwritten in pencil, it eventually will become illegible.

One key document is the hardship letter, in which the borrower states in his own words why he needs to sell at a price that undercuts the lender. "You don't need a novel," just a step-by-step explanation of how you got into financial difficulty, says Karen Mayfield, national sales manager at Bank of the West in San Francisco.

"Be precise; be clear," Mayfield advises. "Offer a bullet-point list in your own hand of the events that led to your hardship. If the lender can't understand how you got into trouble, he may close your file and move on to the next one. Or he may suspect you are trying to pull a fast one."

That leads to another important point: Make sure the hardship letter matches up with all the other documents provided. Depending on the situation, those documents might include key medical records, a divorce decree or unemployment verification.

Other documents lenders may require include tax returns for the previous two years, bank statements for the previous two to six months, pay stubs for at least the previous 60 days, proof of residency in the form of a paid utility bill, a listing agreement and a third-party authorization allowing the lender to deal with the agent.

Gee Dunsten, a Salisbury, Md., agent and popular sales trainer, binds all these documents behind a cover letter and table of contents that "lets the lender know right away that everything it needs is included."

At some point in the short sale, borrowers have to justify the selling price, backing it up with a broker's price opinion or perhaps even an appraisal, a history of the listing that shows attempts to sell at a higher price, a report listing sales of other houses in the neighborhood, a sales contract with a preapproval letter from the buyer's lender and verification of his earnest money deposit and funds to close.

On top of these documents, Dunsten likes to write a personal letter to his client's lender explaining the intricacies of the sale. "When it comes to short sales," he advises other agents, "the devil truly is in the details."