In real estate, one of the most important factors of a successful rental business is making sure that you are charging the correct amount for rent, or the fair market rent.
When tenants are not charged the fair rent for the property they are renting, there could be many problems. One of the most prominent problems is extended vacancy, which is a quick and easy way to lose money.
To combat this, property managers and landlords look to something called fair market rent. This value is very useful in determining the perfect amount to charge for rent and is based on various factors, like the local housing market or the square footage.
In this guide, we will be going over what the concept of fair market rent means and why it is so important. We will also be going over some of the ways that it is calculated and showing how properties affect the market rent.
So, to get started, let's go over exactly what fair market rent means.
What is Fair Market Rent?
The fair market rent is a statistic that is used to determine the amount that should be paid in rent depending on the different characteristics of the property. This statistic is determined by the United States Department of Housing and Urban Development.
Also referred to as the HUD, this cabinet department is responsible for determining payments for housing assistance programs. The most notable of which is the Section 8 Housing Choice Voucher Program. We will be discussing more about these programs later in the guide.
As mentioned before, one of the main responsibilities of the HUD is to set fair market rents (FMRS). These calculations are very important because they serve as guidelines for what landlords should set their monthly rent at. Landlords and property managers review these rental rates every year to make sure that they are charging an adequate amount for their property.
It is also important to distinguish between fair market rents and small area fair market rents. A small area market rent is a gross rent estimate calculated for ZIP codes within metropolitan areas. These small area fair market rents are used to determine the payment standards for Section 8 housing programs. They are also used to set Exception Payment Standards which can be up to 100% of the small area fair market rent.
These calculations are defined as the 40th percentile of rents paid by recent movers in a given FMR area. This means that the prices set by the HUD are slightly lower than the median prices in the area.
When looking through fair market rents, one of the things that property managers or landlords may wonder is:
How is the fair market rent calculated?
To help clear things up, let's go over the process that is used to determine fair market rents.
How is the Fair Market Rent Calculated?
As mentioned at the beginning of the previous section, all fair market rents are determined by one organization, called the United States Department of Housing and Urban Development, or the HUD. The HUD takes tons of survey data and uses it to determine the distribution of rents paid by recent movers across the country.
The way that these surveys have been conducted has changed in the past several years. Before, the HUD would collect local survey data using random digit dialing (RDD). Now, the HUD has changed to using strictly mail surveys and phone questionnaires.
Also, one thing that is interesting to note is that the number of required responses has also changed, Before, the HUD required 200 responses, but now it only requires 100 responses. Another thing to note is that they are not restricted by the Do Not Call registry.
Some of the things that are taken into account when calculating these values include the gross rents data from the U.S. Census Bureau, gross rent information from the surveys, and several other factors, mostly pertaining to the property itself. These factors include the location, size, amenities, and any other special features.
These fair market rents, however, are only for residential properties that span from zero bedrooms to four bedrooms. From there, each bedroom adds 15% to the fair market rent.
Now that we know some more about how these values are calculated, it's time to learn more about some of the programs the HUD is also responsible for.
What are Fair Market Rents Used For?
Apart from determining the rent prices that should be paid, fair market rents are also used for other programs. They are mainly used to determine the rent ceilings for various government programs.
Below, we will discuss more about the programs that utilize fair market rent data as part of their calculations.
Housing Choice Voucher Program
The Housing Choice Voucher Program, also known as the Section 8 Housing Voucher Program, is a program to assist people with extra needs. These people include very low-income families, the elderly, and the disabled.
The main function of this program is to provide decent, safe, and sanitary housing to those groups of people. This housing includes single-family homes, townhouses, and apartments. The important part about these properties is that they are outside of public housing units.
This assistance is provided by public housing agencies, or PHAs. These agencies are issued funds by the HUD and distribute these funds to families that need them. These funds are then sent directly to the landlords to make sure that the funds are used adequately. On average, the PHA will cover 30-40% of the rent payments. In some cases, however, 100% of the rent will be covered by the PHA.
Emergency Solution Grants program
The Emergency Solution Grants Program is a program that is meant to assist individuals and families going through a crisis. The main function is to assist these people in regaining stability and permanent housing after going through some sort of financial crisis.
The ESG program uses the HUD fair market rents to determine grants that are given to states, metropolitan cities, urban countries, and U.S. territories to support homelessness prevention, emergency shelter, and related services.
HOME Investment Partnerships Program
The HOME Investment Partnerships Program provides grants to states and localities that are used to build affordable rental units or homes. These grants are typically granted to low-income families that require some sort of housing assistance payment.
This program also offers low-interest loans to developers for the acquisition or new construction of housing. The borrowers of HOME funds are for-profit developers, nonprofit housing providers, Community Housing Development Organizations (CHDOs), or local governments.
Should Landlords Use the Fair Market Rent?
To conclude, we will be answering a very important question, should you use the fair market rent?
The answer is complicated because it is not a simple yes or no. There are many benefits to renting your property according to the fair market rent determined by the HUD. However, there are also various benefits to using the current market rent determined by the open market.
But there are some cases where the decision is made a little easier. For example, if the current rental rates in your area are less than the HUD fair market rents, you may want to take advantage of the HUD programs. You may be able to use the Housing Choice Voucher Program and rent out your property to a Section 8 tenant.
The most important part of all of this is to price your property as fairly as possible. If the rent is too high, your property could sit vacant for a long period of time. If you set the price too low, you open the door to losing money in the long run.
For this reason, it is essential to set your rent at the perfect price to make sure that your rental properties are making you as much money as possible.
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