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A profitable rental business requires a clear understanding of the market rent in real estate. Determining the correct rent pricing might be the difference between having vacant properties and filling spaces quickly. As a result, determining the market rent in your region is definitely worth the effort. This article discusses what market rent is, why it's essential, and how to calculate it.

Fair Market Rents (FMR) Explained

The rent that a specific property type is anticipated to earn per month is known as the fair market rent or FMR. This value is determined by the U.S. Department of Housing and Urban Development (or the HUD). The size of the property, its type, and location are all factors that determine its fair market rent.

Section Eight Housing Choice Voucher Program and other government housing programs, such as the Emergency Solution Grants Program and the Home Investment Partnerships Program, employ fair market rent to calculate a standardized rental rate. These programs offer rental help to persons who would otherwise be unable to afford a home.

What Is Section Eight?

Section Eight is a housing choice voucher program designed to assist certain people to afford to rent a house by providing them with financial support. These people are given housing vouchers as part of the scheme. In order for an individual to be eligible for such a voucher, they must earn a specific sum of money annually, which is determined by the number of persons in the family.

Landlords who choose to rent their properties out to a Section Eight tenant can expect the Section Eight Housing Choice Voucher Program to send a representative to inspect their property to ensure that it complies with its requirements. If the property passes the Section Eight inspection, the program pays the landlord directly on a monthly basis.

How Much Can You Expect from the Section Eight Program?

As already mentioned, the program determines the Section Eight voucher value based on the family's revenue and the number of people in the family.  The size of the unit that the family is eligible for is determined next.

Because the fair market rent for a property varies substantially based on where it is situated, Section Eight calculates the voucher amount by taking into consideration the fair market rent for that location. It is important to note that the voucher often does not pay the entire monthly rent amount, and the tenant may be responsible for paying the rest of the rent.

Suppose you are contemplating leasing to Section Eight tenants or participating in other HUD programs. In that case, you must familiarize yourself with fair market rents and how they can affect your investment, regardless of where your property is situated.

Why a Landlord Needs to Determine Market Rents

Landlords with existing properties can benefit from establishing the fair market rent as it can assist you in determining whether or not to raise your rents. If you raise the rent too much, or above the fair market rent price, you risk having to pay the mortgage with empty units, as renters may not be happy with this price increase. Therefore, it's wise to do your homework ahead of time.

Using market rent to determine your rent might also assist you in preventing charging your tenants too little. Your personal expenditure, such as property taxes, increases every year, and you must therefore charge sufficient rent to keep your cash flow favorable.

Increasing the rent can be the best method to accomplish this, and it is something you must think about every time your lease is up for renewal. It's also crucial to understand how rent costs are expected to change in the future.

If you are considering investing in a new rental property, knowing the fair market rent can help you determine whether you can generate a consistent profit. You may get a good sense of what you can charge your tenants by looking at the rental prices of similar houses or properties.

This can assist you in determining your cash flow and whether you can receive a positive return on investment. It also helps you make a long-term prediction, giving you a clearer understanding of how long it may take to make up your initial investment.

What Impacts the Market Rent of a Property?

It's crucial to remember that the fair market rent in your area may differ significantly from the national averages and can even vary greatly within the same area. There are several factors that influence a property's market rent.

They are the physical location of the real estate, its facilities, size, and the number of bathrooms and bedrooms it has. Below, we take a closer look at each of these and its impact on the fair market rents.

The Physical Location of the Property

Properties that are located in desirable areas generally have a higher fair market rent than those in less desirable areas. This has a lot to do with its history of safety, its proximity to facilities such as schools and convenience stores, among others.

Owning a property in a more desirable area can earn you much more each month than similar properties located in less favorable areas.

The Property's Facilities

Rental units that have been upgraded or improved have a better market price than those that have not. An example of this is having newly renovated roofs and rent ceilings in your property. Since it has been upgraded, you can obtain higher rental rates for it. Other facilities such as access to outdoor play areas, gyms, and open spaces can fetch you more rent than those that do not include such facilities.

Unit Size

The bigger the property or rental apartments according to square footage, the greater the earnings on the property. This means that even if the property is located in the same area as another smaller unit.

The Number of Bath and Bedrooms

Rental properties with a higher number of baths and bedrooms have a great market rent value, and landlords can charge more for buildings that include more baths and bedrooms even if the square footage is the same. An example of this is a two-bedroom apartment with two bathrooms. This may have a higher rent than a one-bedroom unit with one bathroom.

Demand

Rent prices are also influenced by demand. Suppose there is a large number of people looking for a place to rent. In that case, the fair market rent is higher, whereas if there aren't that many people looking for rental buildings and there are several rental apartments on the market, the market rent decreases.

The market rent determined by the demand for a property is commonly referred to as the current market rent because the price of the rental property is influenced more by the demand than other more stable factors like its location and amenities.

Should You Use the Fair Market Rent or Current Market Rent to Determine Your Rent Prices?

It may be more advantageous to use the current market rent to rent your property, as it is decided by the free market rather than the more generalized fair market rent as determined by the HUD. If existing rent prices in your region are less than HUD fair market rents, you may wish to consider renting your units to a Section Eight tenant.

As a landlord, you ideally want the rent to be reasonable in comparison to the region's average or median monthly rent. If you charge a price that is much higher than the median, your real estate may lie idle for longer than expected, resulting in a loss of money. You must be able to find tenants fast if you price your property correctly.

How Is Fair Market Rent Calculated by the HUD?

Fair market rents are determined on a yearly basis by the U.S Department of Housing and Urban Development. If you are wondering how is fair market rent calculated each year by the HUD, here is a summary.

The 40th percentile of total rentals for ordinary, standard quality units in a property market within a specific area is commonly used to determine the fair market rent. This does not include the low-quality or cheaper units, apartments that have been previously subsidized, and units that were erected within the last two years.

Long-term residents get a reduced monthly rental rate. Hence fair market rent data is generally collected from recently occupied units rather than long-term rental tenants. Fair market rent values cover basic services such as water and electricity but exclude optional extras such as Wi-Fi.

The HUD uses many distinct data types to determine fair market rents, namely the gross rental data from the United States Census Bureau, the gross rental data from the HUD's American Housing Survey, and extra rental rate information obtained annually from telephone polls. Every year, the HUD publishes its yearly fair market rents for around 2,500 distinct places across the United States after conducting this analysis.

Fair market rents vary greatly depending on criteria such as the apartment size and the number of bathrooms and bedrooms, just as conventional rental prices do, as we have already seen.

How to Determine the Market Rent for Your Property

You must know the current market rate in your area in order to establish a suitable rent price. Considering the rents of buildings similar to yours in the neighborhood may keep you from charging excessively high rents, making it harder to locate decent tenants.

Find out what the rental prices are for at least three properties or units in the area that are similar to yours, so that you can have an idea of the typical rent price in your neighborhood. Keep in mind that the number of rooms and bathrooms, facilities offered, and apartment sizes according to square footage must be comparable. Here are a few other tips to finding the fair market rents for your apartments:

  • Liaise with the local landlord's association, who can point you in the right direction
  • Go through advertisements online or in the local newspaper for rental apartments in your area to determine what other similar units are being advertised for
  • Talk to other investors or property owners with nearby comparable properties or buildings
  • Make use of online fair market rents calculation tools

Using Calculation Tools to Determine Market Rents

While calling building owners nearby and browsing through thousands of advertisements may be ways to find the market rents for your real estate, it is not the most practical way to do so. There are several online tools that can help you to quickly and efficiently determine the correct rental rates for your property. Below are some of the most effective tools that you can use.

  • Zillow - Zillow is among the most reputable sites for real estate developments and trends, and they have the ability to pull rental rates from hundreds of advertisements on their website. By selecting the number of bedrooms and the square footage of your units, you can find exactly what you are looking for. An additional feature, Rent Zestimate from Zillow, uses data like facilities, similar property values, and the most recent sale price to generate lower and higher rent projections for your property.
  • Rentometer - The United States News and World Report, and The Wall Street Journal have both praised this reputable site. To determine the median and average rental prices in a specific region, enter details such as the address and the number of bedrooms in the unit. The website also tells you what proportion of units are in a given price range.

Key Takeaways

Whether your units consist of a two-bedroom apartment or a one-bedroom single unit, if you are contemplating leasing your property to a HUD program, such as Section Eight housing, it is essential to understand how fair market rent works. The FMR is the projected rental price of a property with a specific number of rooms within a particular region. These values are calculated annually by the HUD.

Landlords who do not wish to participate in these housing programs can still benefit from knowing what the FMR for your area is. When calculating the market rent for your property, it is crucial to consider factors such as the location of the property, the unit size, facilities, and the demand for it in the open market.

There are several tools on the market to help you determine the market rent for your rental property. Two examples are Rentometer and Zillow. These tools can help you get a good idea of what the ideal rental prices are for your property, as they analyze hundreds of online advertisements to come up with reliable estimates.

David Bitton

David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his two children, he's writing articles here!