Hi ljrtan,
I agree that RE investing is a great way to generate income (although not completely passive) and be assured of keeping pace with inflation. Dh and I jumped into the landlord business over the last 2 years and we are very pleased with how this investment is performing!
In terms of choosing the properties to invest in, we first developed our strategy and goals: Single family homes (broad rental appeal) in newer/nicer neighborhoods (2004+, less major maintenace), 3/2 approx 1500 sq (easy resell), able to generate 8% or greater net income on cash purchase (if you finance, you should be able to better return on cash), good appreciation potential. This strategy has worked very well for us.. very little turn over, tenants keep the property nice, haven't had a deadbeat yet. You can do better financially in rougher neighborhoods, but the hassle factor would likely go up too.
I selected my target neighborhoods by asking 'would I want to live here?' , then used zillow to look at the economics (avg comps vs avg rent).
Here in the phoenix area over the last couple of years, there was plenty of properties that met our strategy and we purchased 5 and the net cash flow is approx $3500/mo.
As a newby myself, I found this blog incredibly helpful, especially in defining/refining strategy before jumping in:
http://www.biggerpockets.com/renewsblog/
We made plenty of mistakes, not fatal or excessively expensive, but none were related property selection. All mistakes were related to prepping the property for rent (check everything and when issues don't defer fixing, it is more expensive/hassle to fix once the tenant is in) or tenant marketing/selection (this will make or break you, so important to get it right).
I hope this helps, happy hunting!
J