Fair Market Rental Value: What It Is, Why It Matters, and How to Calculate It
TL;DR - Fair market rent is what you can charge for rent in a given market. It helps you maintain cash flow and occupancy. Calculating it is as simple as knowing the factors that affect FMR, then finding comparable properties in your local market.
Calculating your fair market rent.
If you don’t do it, you’re SOL.
You’ll either charge too much — which leads to vacancy…
Or too little — causing you to lose out on cash flow.
Ideally, you’d get a fair value for the current market.
And that’s what we’re gonna teach you how to do in this article.
So if you like cash flow…
Keep reading ;)
Fair Market Rental Value: What It Is, Why It Matters, and How to Calculate It
What Is Fair Market Rental Value?
Fair market rental value — or fair market rent (FMR) — is what tenants will pay in rent for a property in a certain real estate market at a given time.
Basically, it’s how much you can charge for rent with your property.
It depends on a lot of factors, which we’ll get into later.
FMR is different from current market rent (CMR). CMR is more dependent on local supply and demand since it’s the rent a property can get in a free and open market.
Why Is It Important?
There are a few situations where FMR is vital.
If you want to make money, that is.
1. Listing a Property for Rent
When you’re searching for new tenants, you want to be competitive within your market.
You also want to make sure you’re maximizing your cash flow.
To covet quality, happy tenants, you should base your rent on FMR.
This is the happy medium.
With FMR, you can set your rent at a price that’ll keep good tenants happy — because they’re getting a fair deal.
And because they know they aren’t overpaying, they’re likely to be more compliant and stay tenants longer.
If you charge above the FMR, good luck finding a tenant. And even if you do find a tenant…
Is the vacancy length worth it? While no one’s renting your property, you’re eating all of that mortgage.
The extra money you could get in rent might not be worth the wait.
On the flip side, charging rent that’s lower than your FMR leaves you with less cash flow.
You’ll get a new tenant in no time! But you’re also selling your property short.
This is why you want your rent to be in line with the FMR.
Your rates will be competitive, offering you a mix of good cash flow and tenant satisfaction.
2. Renewing or Adjusting Rent
As property values fluctuate, so does the rent you can command.
Sometimes you’ll be able to charge a higher amount. Other times, lower.
This is important to review each year.
Regardless, you’ll want to stay updated on the FMR of your property.
That way you can keep occupancy and cash flow high.
Plus, it saves you from raising the rent too much all at once.
3. Buying a Property
The main goal of investing in real estate is to make money. It’s no secret.
That’s why it’s so important to know what you’ll be making on your investment.
Let’s say you purchase a property. You assume that you can rent it for $1,200 a month. The operating costs are $900 a month. Nice $300 profit each month, right?
But then you list it for rent. And you aren’t getting any tenants! The FMR of your property is actually $900.
Now you’re stuck with a property that isn’t generating any cash flow.
After the time you spend managing your property manager and keeping the property in order, you’re actually losing money on your investment.
If you know your real estate metrics — including FMR — then you’ll be able to decide if a deal is good or not.
4. Renovation
Updating and repairing your property is a surefire way to increase its value.
Whether you’re preparing it for new tenants or making it better for current tenants — it’s a good idea.
But how much rent can you charge after the upgrades are finished?
By comparing your property’s rent to others with similar amenities, you can figure that out!
5. Section 8 Renting
The U.S. Department of Housing and Urban Development (HUD) estimates fair market rent annually. This allows them to issue housing vouchers to Section 8 tenants.
For this situation, it’s crucial to know the FMR of your property.
How To Calculate Fair Market Rent
Knowing your local real estate market is the best way to determine FMR.
There’s no substitute for having comparable properties to check in with.
To find properties that are similar to yours, you can use popular websites like Craigslist and apartments.com.
They’ll allow you to do a quick search of your property’s market. You’ll be able to see the number of rooms, bathrooms, amenities, and other features a given property has.
Most importantly, you’ll be able to see how much they’re renting for.
This will give you a baseline to compare your property to.
Ideally, you’ll want to find a property that’s as close to yours as possible. It should also have many (if not all) of the same features. Even better if it was recently rented out.
Once you have a list of comparable properties, it’d be a good idea to check them out in person — if you can.
Online tools only help so much!
That’s why if you’re a remote investor, it’s a great idea to get a property manager in your (future) property’s local area.
Property managers know the area as well as anybody. And they have key insights that’ll help you pinpoint your FMR to a tee.
Your property manager will make determining your FMR simple. We highly recommend getting one!
Online Tools
When you can’t (or won’t) get a property manager, you’ll have to rely on online tools as a remote investor.
We don’t recommend using Zillow or Redfin as the sole tools to determine FMR. They’re highly inaccurate because of the algorithm they use.
You can use them to get a rough estimate, but even that might be shaky at best.
There are two tools that we prefer over all others for determining FMR:
They allow you to view rent prices and comparable properties, which is exactly what you need for this.
These tools will help you get a good estimate of your FMR. But at the end of the day…
A property manager will help you the most.
We’re just asking you to think about it ;)
What Affects Fair Market Rent?
There are certain factors that play into what rent you can charge.
It’s best to keep them in mind as you find comparable properties.
The location - Public transportation, safe area, proximity to downtown, etc.
Number of bedrooms and bathrooms
Size of property - Square footage
Condition and age of property
Type of property - single-family, duplex, condo, etc.
Included utilities - Electricity, water, gas, etc.
Amenities - Central air conditioning, pool, outdoor space, view, washer/dryer, etc.
The more desirable your property, the higher your FMR will be.
And the higher your FMR, the more cash flow you’ll get.
So if you want to increase the value of your property, look no further.
Now that you know what FMR is, why it’s important, how to calculate it, and the factors affecting it, you’re in a good spot.
You won’t be under or overcharging on your rent ever again.
And you’ll be able to accurately determine the profit you’ll make on a new deal.
All that’s left is to put in the work.
As always…
Happy hunting!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
