Three years is a fairly short time-frame in which to buy, then sell, and at least break even. Right now, the real estate market appears to be strengthening some. But there are a lot of concerns--over the likelihood that interest rates will rise, over the concern regarding all the foreclosures that haven't been released onto the market, over questions regarding whether the economy is recovering, and so on. If you'd said five years, that might be different. But for a shorter time frame, you really need a reasonable assurance that the economy and the real estate market are going to do well in the short-term. Even if I guess that there's a 70% chance of the economy and the real estate market steadily getting better, how would you feel knowing that there's a 30% chance you'd have to do a short sale or face foreclosure in three years?
You could reduce the risk some by finding and buying a real bargain--something perhaps 20% under market value. That way, the market could remain flat or even drop slightly and you could break even. And you did mention investment potential in your question.
I'm not an accountant, so what follows is not accounting advice. For that, please see an accountant.
One other strategy to consider is a lease-option. Lease with an option to buy. However--unlike the way most options are written in that they're not assignable--make sure your option is assignable. Then, in three years, if prices have gone up, you sell the option to someone who wants to buy.
Example: You find a house that you could rent for $2,100. Its fair market value right now is $400,000. You do a lease option on the property--keeping both the rent and the option price as low as possible. Let's say it's a 4 year lease-option with rent at $2,400 with $500 a month credited to the purchase price. The option price in 4 years is $450,000. The up-front option fee is $5,000.
You'll pay that $5,000 up-front option fee and an additional $400 a month in rent (though if you were just renting, the landlord likely would raise the rent annually). So over 3 years you'd have paid an extra $19,400. (You'd do a 4 year option to give yourself some breathing space, even though we're working with a 3-year plan.)
If prices drop 5%, you'd only lose that $19,400. But if you'd bought, the value of the home would have declined by $20,000, on top of which you'd have sales costs (up front costs plus real estate commission, etc.) of maybe $20,000. So you'd be way ahead with a lease-option.
If prices rise 20% (that's about 7% a year, around the historical average), you'd have $19,400 to apply to the purchase of the property, bringing your actual cost down to $430,600. The house would be worth $480,000 (20% above your today's value of $400,000). But you wouldn't buy. Instead, you'd find someone who wanted to buy the house. Then you'd assign the option to them for an assignment fee. The option is worth $49,400 (the difference between the value of $480,000 and the $430,600 actually due to the seller). You assign the option for $49,400, repay yourself the $19,400 that you have "invested," and walk away with $30,000.
And while you won't have gotten the tax deductions for taxes, you'll also have paid very close to the fair market rent, which--when considering all the expenses of ownership--are less than purchasing. (If you do want the benefits of the tax deductions, look into using a land trust as the purchase mechanism--see http://www.landtrust.net
for more information.)
It's a much safer way to handle today's uncertain economy than buying if you're looking at a short-term situation. You minimize your downside potential, and yet can benefit from rising values.
Hope that helps.