One thing that can stop many rental property owners from succeeding when it comes to generating a solid income from their investments is not knowing how to set the rent price correctly.
In order to have a reliable cash flow coming from your rental property, you need to make sure that the cost of rent you’re charging your tenants is high enough to cover any expenses that are related to the property, including your mortgage.
However, setting the price too high can have consequences as well, as your property won’t be able to attract tenants in a competitive market if the rent costs more than it should. This is why higher rental rates are not always the best way to ensure greater returns.
A successful rental property owner will be able to determine just the right price for their rental home based on the fair market rent. At the end of the day, anyone who chooses to invest in rental properties should understand exactly how to determine the fair market rent of any unit.
Whether you’re a new investor who just purchased their first rental property or a seasoned owner with an extensive portfolio, knowing the fair market rent of your property is crucial to maintaining a consistent income.
Keep reading to find out exactly what fair market rent is and how you can determine the right cost for your rental home.
What Is Fair Market Rent?
Fair market rent, also known as FMR, refers to the amount of money that a rental property in a specific area should cost at a given time. Essentially, this number is based on the amount that the average tenant would pay for a similar property to yours in the same neighborhood that your property is in.
By comparing these prices, you should be able to get a good idea of the maximum price that you will be able to charge for your rental home while remaining competitive in the rental market and attracting new tenants/retaining current residents.
Why Is It Important to Determine the Fair Market Rent of Your Property?
There are many benefits to taking the time to determine the fair market rent for your property. Here are some of them:
1. You Can Market Your Rental Property Effectively
When it comes to being a successful rental property owner, pricing your rental home is crucial. Using the fair market rent in your area and basing your rent on that will let you create a balance between being able to maximize your income as a landlord and ensuring that you will be able to find qualified tenants to live in the home.
If you have the right cost of rent, you’ll be able to find a reliable and qualified tenant quickly and easily. You will also be able to retain your current tenants for a longer amount of time, all while earning a consistent income from your property.
The fact is, if you charge too much for your rental property, it will most likely sit vacant for a much longer time than is ideal for any property owner. After all, the longer your property sits vacant, the more money you’ll lose as you continue to cover the various costs related to the property, such as your mortgage, without any returns.
This can go on for months if your rent cost is too high, resulting in a large amount of lost income. Additionally, you may not be able to retain your tenants if they decide not to renew their lease so they can move into a property with a lower rent cost.
You should never be charging well above the FMR unless your rental home has a feature that makes the property considerably more valuable than other properties in the area. Even then, you will end up spending extra time and energy having to convince tenants of the value of your property compared to others that are available at a lower cost.
It’s also important to avoid charging too little for your rental property. If the cost of rent is lower than it should be, you will probably find a tenant quickly. However, this will come at a cost, since you may end up losing money if you aren’t charging enough.
If your prices are too low, you could struggle to break even on the costs related to the property, and you may not be able to maintain a solid cash flow. At the very least, you should always be able to break even on your property with your rental income.
2. You Can Accurately Adjust Your Rent Prices Down the Road
Determining your fair market rent is usually the most useful before you make the property available by listing it for rent.
However, if you already own and operate a rental property, determining its fair market rent can help you decide whether you’re charging too little or too much and need to adjust accordingly. This will help you to maximize your income as a landlord in addition to increasing your occupancy rates.
As any real estate investor knows, the value of a rental property usually increases and decreases greatly over time. When this occurs in the real estate market, you can either reach an agreement with your tenants to change the cost of rent during their lease, or you can change the rate in between tenants.
However, it is important to take a look at your state’s rent control regulations before doing this so you can avoid getting into legal hot water.
3. You Can Choose Your Next Purchase Wisely
When you are looking for a new investment property to buy, getting familiar with fair market rent can help you determine whether or not the home will be worth it in the end by allowing you to calculate the potential income you could receive in rent payments.
For example, if the fair market rent of a property that you are looking to purchase doesn’t end up being higher than the costs required to operate it, then the investment may not be as lucrative as you initially thought. Doing these calculations before buying a property can help you to avoid making investments that won’t bring you a substantial return.
What Factors Can Influence a Property’s Fair Market Rent Cost?
Now that we’ve gone over why it’s crucial to know your property’s fair market rent, let’s talk about what factors may affect your calculations and the amount that is appropriate when it comes to setting your property’s rent.
When calculating the fair market rent of your property, you should take the following into consideration:
- The location of the property: The location of your property may be the biggest factor when it comes to determining the price of your rental property. How desirable is the neighborhood? Is it close to good schools, grocery stores, public transportation etc.? Is there a low crime rate? These are all things to consider.
- The size of the property.
- The number of bedrooms and bathrooms.
- The type of property. Is it a duplex, a single-family home, or an apartment unit?
- What amenities does your property offer to potential residents? It could have recent upgrades, an air conditioning system, an outdoor space for your residents to enjoy, a pool, or a wide variety of things that make your property desirable to new tenants.
- How old is your property?
- The overall condition of the property.
- Whether or not the cost of utilities is included in the rent price (gas, water, or electricity).
Generally speaking, the more desirable qualities that your property has, the more you’ll be able to charge for rent while still remaining reasonable and attractive to tenants.
How to Calculate Market Rent
To find the most accurate estimate when it comes to the fair market rent for your property, you may need to do some research. Ultimately, this is best determined by looking into what other landlords are charging their tenants for similar properties in your area.
To start, find out the cost of rent for three other similar properties in the area that are currently being rented out to tenants, and then find an average.
When conducting your research, you should also take all the factors listed above into consideration. The more similar your properties are when it comes to desirable attributes such as location, size and amenities, the more accurate your fair market rent estimate will be.
If all of your comparables are filled with tenants, that means that those rental homes likely have reasonable rent prices that are close to the fair market rent. If there are any local listings that have been vacant for a long time, it is fair to assume that their rent prices are too high. This information can help you know what not to do.
Bottom Line: All You Need to Know about Market Rental Value
When it comes to your rental property, setting the right price can make all the difference between a successful landlord and a vacant home.
Take the factors above into consideration and get the best ROI on your property possible.
