One of his assumptions, that rent prices will continue to pace inflation, might be flawed though.

My wife and I own three houses, one of which we live in and two of which we rent out. I've been renting houses out for about ten years now, and we've owned or rented our own dwelling over that same period of time.

I've found that, since we bought both houses before the 'housing boom' of the past five years, we are able to rent both houses out for enough money to cover the payments and maintenance/upkeep. I've also found that the rent we ask, and the rent other comparible houses in the same market ask, has gone up about the same rate as inflation (our townhouse has gone from $900 / month in 1998 to $1200 / month this year). I also expect that rent to go up 10-15% over the next three years. Why will that differ so much from the previous ten years?

Pretty simple, really - the law of supply and demand. For the past three or so years, it's been close to impossible to buy a house with the specific goal of making it a profitable investment rental property. Housing costs relative to local rents are just too high to enable an investor to do that. Without a drastic reduction in housing costs to pre-2003 levels (highly unlikely), this trend will continue for a while (I'll throw ten years out there for the sake of argument). During that period, existing rental properties will continue to be sold or torn down and replaced, thus reducing the existing supply. Limited new rental construction + reduced existing supply + increasing demand due to fewer folks being able to afford to buy a house at the current cost = sharp increase in rent.

This is already apparent in the SOCAL area, where rental property owners are capitialzing on the short-term profits they can make by selling their rental property to homeowners. You can bet the folks that bought that $750K house last year that used to be a rental aren't going to turn around and try to rent it out immediately - they'll never cover their mortgage if they do. There's enough existing rental properties to cover the gap...for now. But I definitely expect that to change. If the cost of housing won't come down to meet the rent, the rent will increase to meet the cost of housing. (*)

I'd also add that he's in NYC, which is its own unique rental market with its own unique controls in place to artificially keep rents down. Of course its smarter to rent in a place like that - you keep market forces at bay with regulations that are in place to make renting affordable.

Something else to think about: it may entail some headaches, but renting out a house that you own is, in essence, free money. The tenants in our townhouse pay enough rent to cover the mortgage, insurance and property taxes, as well as periodic maintenance, upkeep and my yearly travel expenses to the area. I even have a bit of money left over each month which I tuck away to cover non-periodic maintenance. In another two years or so, I'll be able to take out a home equity loan on the property and use that for other investments - and their rent will cover the interest on that loan.

I've got other theories on real estate, why it will continue to appreciate in value, why it's still a good investment, etc, but I've got to get back to work...

Kastellyn the Devourer of Magic, Lord of Legends

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(*) Anecdotally, we rented a house for the past two years in Coronado (granted, that place is its own weird SOCAL real estate market) for $2300 / month. When we bought the house that we currently live in, that rental property sold within a month for $1.2M. And it was a total dump. I'll let you do the math, but I expect there to be practically no rentals left on Coronado in about five years.