The current real estate climate should cause a shift away from home ownership and towards rental properties. Credit is available to fewer people than it was just six months ago, so more families will find themselves in rental housing. In addition, would-be buyers are in a holding pattern waiting to see what happens with the present housing slump
Investment property owners are well positioned in this scenario. While the value of their investment property may take a hit, increasing rents and declining vacancy rates should help offset some of this pain..
The November 12, 2007 Fortune Magazine has an article showing the link between housing prices and rental prices. ?Rents exercise a kind of inevitable gravitational pull on prices?while prices soar from time to time, sending the ratio to exceptional heights, sooner or later the relationship is bound to return to its historical average.
The article goes further to list the current and historical averages in 54 metropolitan areas. In most markets, housing prices are way out of line with rental prices.
It is interesting to take a closer look at the Fortune Magazine figures. Nationally, home values over the last 15 years have been 16.2 times that of annual rent. Historically, if rent were $1500/month, the value of the home would be $291,600. In June 2007, the ratio was 22.8. The same $1500/month rental property would be valued at $410,400. If the Fortune article is correct and normality will return then either rents need to go up to $2100/month on homes like this or home values need to come down. Likely we will see a little of both.
This analysis makes a strong case for owning investment property. As long as you can weather the short-term turbulence, you will get your returns on strong rental income, or you will get your returns on property appreciation.