Investors hoping for returns face a two-year wait: market slump means delays in income property yields.

Investors in income properties may have to wait another two years to cash out as an oversupply of housing continues to push up vacancy rates and force down rents.

"I don't think anyone knows how long it will take for this to rebound," said Elliott Gorin, real estate agent for Jon Douglas Co., in Los Angeles.

Changes in tax laws and an across-the-board saturation of the rental market are partly responsible for a drop in real estate values.

People converting their homes into investment properties is one of the biggest causes of the glut in the rental market, Gorin said. Many owners of single-family homes feel trapped because values have declined by 25 to 30 percent since 1989, and they cannot recoup what they put into their investment. So they have opted to lease their properties instead of putting them up for sale.

Meanwhile, Santa Monica is exempt from the rental-property glut because rent controls have motivated people to stay put. But in regions of Los Angeles where vacancies remain a problem, developers have had to use incentives to lure prospective tenants.

This applies to Pacoima, Panorama City, Lake View City and other parts of the Northeastern San Fernando Valley where a mid-1980s surge in construction left developers stuck with extra housing stock. Typically, this happened to properties that had been transformed from single-family homes into multi-unit dwellings.

An abundance of attractive new apartments failed to lure renters to the poorer communities, said John Kerin, regional manager for Marcus & Millichap Real Estate Investment Brokerage Co., Inc., headquartered in Palo Alto. When the pool of suitable tenants declined, harried property owners rented to some tenants with questionable financial backgrounds, Kerin said. Many of these people fled after leases were signed, boosting the vacancy rates.

In fact, the vacancy rate in the Northeast San Fernando Valley has risen only slightly since 1990. But now development has stalled in the wake of a construction boom in the mid-1980s in sections of Van Nuys and North Hollywood, and pockets of Sherman Way and Roscoe Boulevard extending all the way out to the West Valley, said Dan O'Connell, president of Apartment Building Appraisers & Analysts in Tarzana. He does not expect the situation to improve for another 18 to 36 months.

Overbuilding also is a problem for redevelopment areas, such as 740 acres in North Hollywood and 1,100 acres in Hollywood. The Los Angeles Community Redevelopment Agency promoted growth in these communities during the 1980s. Then the market shifted, and rents now are down by 10 percent from 1989 and many apartment houses are in foreclosure, O'Connell said. Eighty percent of his company's appraisal work involves properties that have been foreclosed upon or are in bankruptcy, compared with less than 5 percent three years ago.

Unlike neighboring communities, Glendale and Long Beach have been able to absorb the heavy construction that took place in the late 1980s, O'Connell said. As a result, foreclosure rates on income properties did not rise as rapidly as in the Mid-Wilshire district or in Hollywood or the San Fernando Valley.

While some residential markets in Los Angeles County are flooded with excess housing, Preston Hawkins, president of Herbert Hawkins Co., said he has seen no sign of this trend in Pasadena, Glendale, Alhambra, Arcadia, Covena or La Verne.

A sudden drop in rent prices is one of the most visible signs that an investor is having difficulty holding onto his property, Hawkins said. For Pasadena and Arcadia, a reduction of 10 percent in the past 18 months is not immediate cause for concern. Another 10 percent drop would be enough to trigger a new wave of rental property moving onto the market, he said.

A basic change in tax laws in 1986 set in motion a construction boom as developers attempted to get projects on-line before tax advantages disappeared. That helped to create the oversupply of residential housing, said Fred Sands, founder and president of Fred Sands Realtors.