Posted over 1 year ago

How to Determine Fair Market Rent

Whether you’re an aspiring landlord who’s working on obtaining their first rental property, or an experienced landlord with a large portfolio of properties spread over multiple states, one thing you will inevitably need to be able to do is accurately determine the Fair Market Rent for a property.

WHAT IS THE FAIR MARKET RENT?

It is essentially the going rate that rental properties in a specific area can be expected to rent for when compared to other properties of similar size, condition, and amenities.

WHY IS DETERMINING THE FAIR MARKET RENT IMPORTANT?

If your property is priced too high or too low relative to other properties in your market, you’ll be missing out on money – and it could get quite costly.

For example, if the average 3 bedroom home in your market goes for $1,000/month and typically rents in two weeks, it may be tempting to try to advertise it for $1,250/month thinking it’ll be nice to have that extra $250/month in cash flow.  However, if the house sits vacant for an additional few months – or worse, doesn’t rent at all – that potential extra cash flow (and possibly any other cash flow) gets wiped out entirely.

Conversely, if you price the rental too low – say $700/month in this example – it may rent lightening fast – but then every month that tenant is in the home paying well under market rent, you’re losing money month after month for as long as the tenant is in the property paying the reduced rent amount.

The best option, just like in the story of Goldilocks and the Three Bears, is to find the rent amount that’s “just right”, and charge that.

WHAT FACTORS SHOULD BE TAKEN INTO CONSIDERATION WHEN DETERMINING THE FAIR MARKET RENT?

These are some of the factors you should consider when determining the Fair Market Rent for your property:

~ Number of bedrooms and baths

~ Size of the property

~ Condition of the property

~ Type of property (apartment, duplex, single family house)

~ Amenities (pool, gym, large yard, etc)

~ Whether there’s a garage, storage area, and/or covered/assigned parking available

~ Who pays for utilities and any other expenses (gardener) – landlord or tenant

~ Desirability of the location – is this an “A-Class” location (new/hip/trendy area) where people want to live; or a “D-Class” location (crime-ridden/warzone) where people have to live?

~ Demand for rentals in the specific market (strong or weak?)

WHAT RESOURCES ARE AVAILABLE TO HELP A LANDLORD DETERMINE THE FAIR MARKET RENT?

Fortunately, in today’s day and age, landlords have a variety of online resources readily available at their fingertips to help them accurately determine the Fair Market Rent.  Below I’ve done my best to give you my unbiased opinion of some of these resources, and the best way to use them.  These resources include:

~ The MLS = The MLS is most commonly known for sales listings.  However, it is also used in some areas for rental listings.  If it’s used for rental listings in your area, it can be an invaluable resource because it often shows what price properties were listed for rent and what price they were ultimately rented for.

~ Craigslist = Landlords and property managers almost everywhere use Craigslist.  As such, it can be a great place to go and see what your competition is charging and to get an idea of what you might be able to charge for your property.  Keep in mind that just because someone is advertising something for rent at a particular price, it doesn’t mean that it’ll rent at that price.  However, if you can find a large enough sampling of ads, you can usually get a pretty good idea of what price a property should be listed to be competitive.

~ Zillow = People seem to either love Zillow or hate it.  Often times when I hear someone complaining about Zillow, it’s because they just look at their “Zestimate” of a property’s estimated value or the “Rent Zestimate” for a property’s estimated rent amount and they feel one of those estimates are not accurate.  However, in my opinion, that’s not the best way to get the most value out of Zillow.  I don’t even look at the “Rent Zestimate”.  I just pull up the address and then look at the surrounding neighborhood for comparable properties listed for rent to get an idea what my competition is charging.  You can even filter the properties by home type (i.e. apartment, houses, etc), number of bedrooms, baths, year built, etc.  In my opinion, if you know how to use it, it’s one of the better resources out there.

~ Rentometer = Here’s another one where you really have to know how to use it for it to be of any real value.  However, it can be quite helpful if you do know how to use it, and you understand its limitations.  There’s a free version and a paid version, but if you’re just using the free version you’ll just get a rent range based on nearby properties with the same number of bedrooms.  The free version doesn’t take into account the type of property (apartment vs house), the number of bathrooms, the condition of the property (and unlike some of the other sites, like Craigslist and Zillow, there’s no photos to help determine what the condition is for yourself), or the date the property was listed for rent (so it could be an outdated listing).  So what value is that you might ask?  Well, often times it’ll give you the actual address for the properties it is using as “comparable properties” and – when it does – you can do further research to determine if they are, in fact, suitable for use as comparable properties in helping you establish the rent amount for your property.

~ RentRange = This site doesn’t have a free version.  However, you can purchase reports that will give you a rent estimate for properties in select markets.  These reports also include a list of comparable properties and data such as rental trends in the same zip code and county of the subject property, trends for properties with various numbers of bedrooms, average days on market, etc.

~ Zilpy = This site will only give you a “Comp range” (similar to Rentometer) unless you upgrade to a paid account.  If you upgrade to a paid account, you can get more detail, such as a rent estimate, rent comparables, neighborhood information, etc.  However, without a paid account, you can’t even see what data their “Comp range” is based on.

~ Trulia = Similar to Zillow, which makes sense because it’s owned by Zillow (so Zillow listings also appear on Trulia).

~ HotPads = More focused on apartments in urban areas, but it does have some listings for other home types (i.e. duplexes, houses).  Also owned by Zillow (so Zillow listings also appear on HotPads).

~ PadMapper = Strictly focused on apartments in large metropolitan markets.

~ RentBits = Tracks the average rental rates for the last 14 months in select cities across the U.S.  In my opinion, the information provided is interesting, but too broad to be useful in establishing rental rates for individual rental properties.  This site focuses more on information for cities as a whole, as opposed to the granular type information for a specific neighborhoods.

Other options and potential resources to help you determine the Fair Market Rent can include:

~ Property management companies = Call a few local property management companies and ask them their opinion on what they think the property should rent for.  A word of caution, in my own experience, I sometimes see property management companies occasionally pricing properties a bit on the low side.  This can often result in properties renting quickly, and maybe that’s the point, since property management companies (property owners too for that matter) don’t get paid unless a property is rented.  However, if a property is priced too far below the market rent, that’s money you’re missing out on each and every month.  So don’t just call one property management company and take their word for it.  Get the opinion of several local property management companies.  Better yet, get the opinion of several property management companies AND supplement what they tell you with your own independent research using the previously listed online resources.

~ Yard signs = If you’re local, simply drive the neighborhood and look for other rentals in the area with yard signs.  Some of these signs will actually have the details of the property and the rental price listed right on the sign.  For the others, simply call the number or visit the website and inquire about the property and the rent amount.  Also, if there happens to be an open house scheduled, there’s nothing wrong with attending and seeing how the property stacks up against yours.  You might even get some ideas for improving your property or make a new connection with another landlord in the area.

~ HUD Website = You can go online and check the Fair Market Rents that the U.S. Department of Housing and Urban Development (HUD) uses to the determine payment standard amounts for the Housing Choice Voucher (Section 8) program in select counties throughout the country here: https://www.huduser.gov/portal/datasets/fmr.html.  (Note: The amounts listed are not necessarily what HUD pays the landlord. They are gross rent estimates that include the rent plus the cost of all tenant-paid utilities, except telephones, cable or satellite TV service, and internet service. However, the published amounts can give you an idea of what HUD might pay and help you compare different markets.)

Ultimately, it’s important to remember that there is not one single source that will accurately be able tell you what the Fair Market Rent is for a particular property.  The only way to accurately determine the Fair Market Rent for a property, is to use multiple sources – and the more sources you check the better.  It may seem like a time-consuming effort, but it’s one that will pay dividends for years to come if done properly, and can cost you substantially if not done properly.



Comments (3)

  1. Thanks for the great article Kyle, this is extremely helpful!


  2. Great resource, thank you!


  3. Very useful information. Thanks.