What Is Fair Market Rent?
One of the most vital factors in determining the success of a rental property investment is your understanding of Fair Market Rent. Having the right rental price is essential in determining whether you will attract not only tenants in general, but the right tenants, to your property.
Having good rental rates will help you find a tenant quickly, and will hopefully keep that tenant in your property for a long period of time. As such, understanding what Fair Market Rent is, and then pricing your property appropriately, will go a long way to determining your success in this area.
What Is Fair Market Rent Value?
Much like comps on single-family homes that are for sale, Fair Market Rent is a measurement that is used to determine the estimated value of a property with a specific number of bedrooms in a specific area of the country in terms of rent prices. Fair Market Rent will fluctuate in a specific region based on the current market values of property in general, and will be based on what people are generally willing to pay for a rental property that is similar to yours.
In fact, fair market rent values are calculated annually by the U.S. Department of Housing and Urban Development, as they use it for supplemental programs they provide. This goes to show just how important pricing your property properly is. HUD uses theses Fair Market Rents to determine rental voucher amounts for government housing programs such as the Housing Choice Voucher Program, also known as Section 8 Housing.
How Is Fair Market Rent Calculated?
Fair Market Rent will include not only how much the monthly rent goes for at a particular property, but also factors in items such as utilities a tenant would be required to pay at the property, such as electric, water or gas. Fair Market Rent does not take into account a tenant’s other expenses, such as their cable, Internet or cell phone service.
How to Determine Fair Market Month-to-Month Rent?
Fair Market Rent will give you a maximum number that you should be able to charge for the monthly rent at your property. This isn’t to say you shouldn’t charge this top amount; it’s just a guideline to let you know what you shouldn’t go over if you want to ensure your property rents quickly.
Fair Market Rent will take into consideration:
- The size of your rental property, including the total square footage, number of bedrooms and number of bathrooms
- The location of your rental unit, as some locations, such as New York City, can charge significantly more in monthly rent than suburban or rural locations
- The demand in your location, as that could drive up, or down, the price
- The amenities that your property provides, such as whether there is a good outdoor space, has central air conditioning or was recently renovated.
All these factors go into determining what the Fair Market month to month rent will be for your property. In general, the monthly rent should be at least 1 percent of the initial price that you paid for the property. If you bought the property for $100,000, for example, you should get at least $1,000 in monthly rent from it.
Should You Use the Fair Market Rent When They Decrease?
If your property is currently vacant, you should always use Fair Market Rent as your guideline for what you should charge, even if the Fair Market Rent in your region decreases. It’s never a good thing to be well above the Fair Market Rent, unless there is a particular reason why your rental is significantly more valuable than others. Even then, you may have a hard time convincing prospective tenants why they should pay so much more for your property than they would at others in the market.
How to Find Fair Market Rent in a Zip Code?
HUD makes finding Fair Market Rents by Zip Code very easy to do. When you go to the HUD’s Fair Market Rent webpage, you can search for each year’s Fair Market Rent data. You first select the state you wish to view, then the county in that state. When you choose both of those options, you will be given results of Fair Market Rents for every Zip Code within that county, broken down by efficiency, one-bedroom, two-bedroom, three-bedroom and four-bedroom units.
This is an extremely valuable resource that you can use to search not only your specific Zip code, but the ones around you.
What Is the Fair Market Value of my House?
Much like Fair Market Rent, the fair market value of your house can be determined by looking at factors of your house in your region. While there are a lot of online tools available for you to do this research, it isn’t as simple as going to the HUD website and getting official numbers run by a government agency.
Instead, you will need to take a look at the comps of recently sold homes in your neighborhood that are similar in size, style and quality of your property. You will want to look at not just what homes in your area sold for recently, but also what they were originally listed on the market for and how long they sat on the market. Then, compare this with other homes in your area that are currently on the market to see what your fair market value might be.
In addition, you could get an official appraisal from a real estate professional or independent agency to get you a closer estimate. This will cost you some money, but might be worth it if you have a unique property or if there aren’t a lot of homes that have sold in your neighborhood recently.
Determining the Fair Market Rent Value of your property is essential before listing your property on the market for rent. The ideal situation for any real estate investor is to get the highest rent with the best tenant for as long as possible. If you are priced too high for your area, this will be next to impossible.
Likewise, if you price your property too far below Fair Market Value, you may end up landing that ideal tenant quickly, but you could also be leaving a significant amount of income on the table each month. Investing in the real estate rental market can be very rewarding, as they generate income and help build wealth, but it takes time and patience to capitalize on the market.
Doing your homework before you list a property is essential. You need to make sure you have positive cash flow, which is done by ensuring you receive more income from your monthly rent than it costs for you to operate the property, including taxes, insurance, utilities and any HOA dues. Identifying Fair Market Rent Value first is a key piece in this equation, as if that number doesn’t exceed the costs of your property, then it probably won’t be a sound investment.
You can better position yourself to make a sound real estate investment by utilizing HomeUnion®’s RENTestimate tool. It can help you get a good valuation on a potential investment property, as well as the rent valuation and estimated costs as well.