In the last 18 months, the U.S. has been experiencing a significant decline in home ownership, attributable to a number of factors (people that bought too much house, lenders that allowed people to buy too much house, crazy calculations that turned subprime mortgages into A+ investments to be sold to the secondary mortgage market, the list goes on and on).  We are experiencing a wave of foreclosures and short sales that is seriously lowering the median home prices in the majority of American metro areas.

Home ownership reached it’s peak in 2005 at 69% (which means that 69% of the population owned a home).  By 2010, that number is expected to drop to 63%.  This equals a 10% drop in home ownership.  These numbers represent a golden opportunity to the savvy real estate investor—when fewer and fewer people are in a position to buy a home, they are forced to rent, which drives up the market rent rates.

Decreased Home Values + Increased Rental Income = Cash Flow & Faster ROI

This fairly straightforward formula is supported when you look at cap rate trends (as a reminder, Cap Rate = Net Operating Income ÷ Value). Over the last 10 years, cap rates were dropping fairly consistently; 2008 is showing signs of improvement in real estate cap rates.  At CGI, we believe that cash flow return will increase by 40-50% by 2012.  For this reason, we recommend our clients to invest in real estate based on the projected dividend (or cash flow), rather than the valuation (or appreciation) of the property.

For related articles, click on the links below:

Rental market surging as home sales, prices fall

Renters can't escape housing foreclosure crisis

Foreclosure Activity Up 14 Percent in Second Quarter

Cap rates tipping up

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 Ofer Goldenberg is the Owner and CEO of Capital Growth Investment.