Accurately pricing a rental property is an important part of owning rental real estate, and determining fair market rent is a key element of this. Your rental income must be high enough to pay the mortgage, maintain the property, and make a profit. If you get the rental rate spot on, you will rarely want for good tenants for your rental units. Setting the price too high, however, can mean your property sits vacant while you struggle to find occupants.
Whether you’re a new landlord who is getting started in rental property investment, or an experienced landlord managing many properties, the information below can help you when determining the fair market rent for a rental property. Read on to find out what exactly market rent is, why it’s essential to determine it, and which factors influence it the most.
What is fair market rent?
Fair market rent is the monthly amount of rent a property type is likely to receive in a particular area. The amount is determined by how much renters are able and willing to pay in your area, and the best indicator is what other landlords are charging their tenants for similar properties.
Fair market rent is established annually by the U.S. Department of Housing and Urban Development (HUD). Rents are determined by the property's size, type, and location. For example, a two-bedroom fair market rent in a rural area could be $800, while it could be $1,300 in a more expensive metropolitan district.
Why is it important for landlords to know their local fair market rent?
For most rental property owners, knowing the fair market rent is a starting point when determining a rent amount. You’ll want to be aware of the market rate in your neighborhood so you can set an appropriate rent price. Charging too much (above market rent) can mean extended vacancies, leaving you to cover the mortgage on an empty unit for several months. Charging too little for rent risks undercutting potential rental income. Expenses (including property taxes and employee salaries) rise each year, and landlords need to charge enough rent to maintain a positive cash flow. Determining market rent can help you avoid charging too little.
Determining the fair market rent for your property helps reduce the risk of vacancy and can also increase the number of applicants vying to rent your property. The more applicants you have, the greater your chance of finding good tenants. Setting the right rent price and thoroughly screening your tenants are two of the best ways to ensure the highest possible profit as a landlord.
When you’re looking to purchase a new rental property, having an idea of market rent can enable you to decide if you’ll earn a reliable income from the property. The rent prices of comparable properties will give you a good idea of how much you will be able to charge your own tenants. This will help you calculate your cash flow and help you determine if you will get a good return on your investment. It will also help you make a long-term projection, so you have a better idea of how long it might take you to pay back your upfront costs.
Determining market rent can also help when deciding whether to increase rent, and it’s something you’ll want to consider at each lease renewal.
What factors influence fair market rent?
Fair market rent is typically determined by multiple factors. Generally, the more desirable features of your investment property, the higher rent you can charge.
An apartment complex generally has a lower fair market rent than a single family home, whereas duplexes and townhomes generally fall somewhere between the two.
If your rental is in a desirable area, you can charge a higher rent than a property in a less desirable location.
Upgrades, open floor plans, and outdoor spaces can all differentiate your property from a similar one in the same neighborhood and allow you to ask for more rent.
More square footage can equate to higher rent.
Bedrooms & Bathrooms
The more bedrooms and bathrooms your property has, the more likely it is that you can charge a higher rent.
Properties that are in better condition, with modern features and appliances, generally obtain a higher fair market rental value.
How do you determine fair market rent?
There is no standard calculator or “one-size-fits-all” response to determining fair market rent. With so many factors at play, fair market rent needs to be calculated for every property individually.
The best way to calculate how much rent to charge is to look at the current rent rate for comparable properties in the neighborhood. Check out what other property managers are charging for monthly rent:
- Find three to five comparable occupied properties with the same square footage and number of bedrooms and bathrooms.
- Calculate the average rent for all these properties. This will give you a good idea of fair market rent.
- Adjust rent up or down based on the factors affecting your property. Take into consideration proximity to local amenities such as shopping malls, schools, and open public areas.
Fair Market Rent = (Sum of all comparable properties monthly rent / # of properties) +/- (Amenities)
Keep in mind that you want to price your rental fairly with respect to the median or average rental rate for the area. If you charge too much, your property could sit vacant for longer than planned and lose money in the long run. If you price your rental reasonably in relation to the market for its condition, you should secure tenants quickly.
Want help determining fair market rent for your property? Contact TMG Property Management Services. Our property management specialists can provide you with a Free Rental Analysis today!