The 90% HUD rule — the only rent comp method I trust

[Andrew Bosco]

The 90% HUD rule - the only rent comp method I trust

Most investors find a couple nearby buildings, match the bedroom count, and call it rent comps. Then they wonder why the property doesn't perform the way they modeled it.

The problem isn't the properties they looked at. It's the number they trusted.

Listing agents will show you rents the seller has been charging - which may be below market, or above it depending on when leases were signed. Zillow estimates are algorithmic averages. Neither is a conservative underwriting baseline.

HUD Fair Market Rent is.

What HUD FMR actually is

The Department of Housing and Urban Development publishes Fair Market Rent every year for every metro area in the country, by bedroom count. It represents what a standard unit in decent condition should realistically rent for in that market.

For Manchester, NH right now: a 3-bedroom is $2,442/month. A 2-bedroom is around $1,950. A 1- bedroom sits around $1,550.

These numbers are publicly available. Most investors have never looked at them. Why I use 90% - not 100%

I take 90% of whatever HUD says. For the Manchester 3-bed, that's $2,250/month.

The 10% buffer covers a few things. Lease-up time when a unit is vacant. The reality that your unit might not be the strongest comp in the set. A conservative margin that protects you from overbuilding income before you've seen a dollar of rent.

If the deal pencils at 90% of HUD FMR, the deal actually pencils. If it only works at the listing agent's pro forma - it doesn't work.

I ran this on a live Manchester 4-unit recently. The seller's projected rents were higher than what 90% of HUD FMR supported. At the conservative number, the investor scenario didn't hit my benchmarks at ask price. At $750K, it did.

That one adjustment - using 90% of HUD instead of the listing's projected rents - changed the entire analysis.

Where to find it

Go to huduser.gov. Navigate to "Fair Market Rents." Select your metro area (NH uses HUD Metro Fair Market Rent areas — Manchester is in its own zone). Pull the most recent year's data.

It takes about 5 minutes the first time. After that, it's a 60-second lookup on every deal.

If your deal doesn't hold up at 90% of that number, you already know the answer before you spend another hour building a spreadsheet.