Is it Worth it to Buy a Rental Property Right Now?

Oct 12

5 min read

For the first time in several years, we are seeing investors buy rental properties without getting into bidding wars.

That doesn't mean investing is easy again.

It just means the rules have changed.

The Short Answer

Yes—but only if you buy for the right reasons. The current market rewards buyers who buy based on actual performance and cash flow (not speculation), and buyers who are patient with a long-term plan with adequate reserves to maintain the property and weather occasional vacancies.

Oh, How the Times Have Changed

Just a few years ago, investors enjoyed unbelievably low interest rates and rapid appreciation. It was easier to produce an instant cash flow, and there was room for investors to make some mistakes and still come out ahead. But before you get all nostalgic for the days gone by, let me remind you of the Mad Max-style savagery we were seeing then: a lot of competition to buy properties, and bidding wars galore.

Today, mortgage rates are higher, and investors should plan to hold on to a property for five or more years to see appreciation. Unlike the market at the height of demand, there is more room for negotiating purchase price, and for buyers it can feel a bit kinder and gentler with less competition.

The Litmus Test

Now, more than ever, successful investors are asking, “Does it pencil?” Ask these questions to decide if a rental property is right for you:

Will rent cover my mortgage?
Can I comfortably afford vacancies?
Do I have room for maintenance costs in my budget?
Is this in an area people will continue wanting to live?
Would I still buy this property if prices stayed flat for five years?

These basic questions are just the starting point. You will likely have some criteria that are specific to your situation which further dictate the purchase price, contract terms, location, property condition/features, etc. that will work for you.

Why Now?

If interest rates and property prices are up, why is anyone buying a rental property right now? Buyers we work with are still investing because less competition means more room to negotiate price and inspection repairs. Investors with experience know that interest rates are refinanceable; the rates don’t need to be perfect to make a property a “good buy.” Also, rental property demand remains strong. The current prices and interest rates mean that people who might ordinarily be buying are choosing not (or simply cannot afford) to become homeowners right now.

The Pits of Despair

As with any journey, some dangers lurk on the path to buying a rental property. We want you to avoid pitfalls that some buyers are prone to:

❌ Buying emotionally — Guilty! No matter how cute a home may be, it has to be functional. I have purchased multiple homes without a functional garage despite the fact that I need a functional garage. Don’t be like me!

❌ Forgetting vacancy costs…and the cost of cleaning/repairing/refreshing a property between tenants.

❌ Counting on appreciation — Appreciation will happen! But don’t expect pandemic-era leaps in value.

❌ Underestimating maintenance — All real estate has maintenance costs; even vacant land needs to be mowed or sprayed for weeds occasionally.

Ellensburg’s Rental Market

Ellensburg’s real estate and rental market is a bit insulated and does not always follow national trends. About half of the homes in Ellensburg are owner-occupied and the other half are rentals. Central Washington University, with all of its employees and students, has historically put pressure on the rental market, keeping demand high. That said, CWU enrollment has been down for a few years; more and more students are choosing to complete online degrees. On the other hand, some people who want to buy are still renting because home prices and interest rates have made it more difficult to enter the housing market. For a traditional 12-month lease, the monthly rent range we see for a 1-bed/1-bath unit is $850-$1,250, and for a 3-bed/2-bath unit we see a monthly rent range of $1,500-$2,500.

The steady growth of population and industry in and around central Washington makes Ellensburg a sought-after location for furnished mid-term rental units. Mid-term rentals include properties that offer one to six-month lease agreements. Tenants looking for mid-term occupancy include healthcare workers, contractors, and Ellensburg newcomers who want to move before they buy. For furnished units offering mid-term leases, we have seen a monthly rent range of $1,500-$2,500 for a 1-bed/1-bath and $2,750-$3,750 for a 3-bed/2-bath.

Short-term rental availability, such as Airbnb and VRBO, is limited, but growing! There were once only a few listings, and now there are dozens. Local and regional tourism brings so many visitors to our part of the world. And the local listings do not disappoint — renters can find everything from a basic room to rent downtown to a grain silo turned fully-outfitted apartment. The sheer variety means that the price range for an Ellensburg short-term rental can cost anywhere from around $100/night to nearly $1,000/night.

More Than One Way to Cook an Egg

If it’s in your heart to own a rental property, but it seems unattainable, just know that there are so many ways to get the ball rolling on your journey to buy a rental property. Here is some inspiration from our clients:

Purchase a primary residence with an attached studio/apartment or ADU; live in the main house and rent the studio (or vice versa if you are accustomed to small spaces or you’re down to downsize).
Find yourself a tiny home to park in the backyard and list if for rent.
Buy a duplex or other multi-family dwelling; live in one unit and rent the others.
Build an apartment in your backyard.
Buy a new primary residence and turn your former home into a rental.
Renovate your current home, turning your basement, second floor, or other portion of the floor plan into an apartment.

Our family has used the method of buying a new primary and turning our former house into a rental property a handful of times, and I am a fan! Primary home loan program down-payment requirements are less than what is required for an investment property, thus lowering the barrier of entry (3%-5% down payment required for a primary home purchase, compared to 20%-25% down payment required for an investment property).

Also, when we live in a home before renting it to others, it gives us a chance to fix any problems and anticipate future maintenance issues. If I know first-hand that overwatering the yard floods the basement, I can proactively install timers on the sprinklers so my future tenant’s precious family photos don’t get waterlogged. And I love knowing exactly where the wasps like to build their nests on the patio every spring, so I can easily nip their home-building in the bud and our tenants can actually make use of the space without being harassed.

We have been surprised and delighted that our homes, which have not always seemed like obvious rental candidates, have been enjoyed (and even sought out) by tenants. I say this only to point out that even kind of unconventional homes (our favorites) can make for excellent rental properties.

What Should I Do?

There is no such thing as “a perfect time to invest.” I have noticed that seasoned investors never stop looking, especially during times like these, when the average consumer is perhaps less likely to ask the question, “should I invest in real estate?” It doesn’t necessarily mean that it’s the right time for you, but I think it is savvy to take note of what the “pros” are doing.

Every market creates opportunity; today's opportunity simply looks different than it did in 2021.

The investors who do well aren't the ones waiting for perfect conditions—they're the ones who buy properties that make sense even when conditions aren't perfect.