How to Calculate Fair Market Rental Value
By Darren Weaver, Assistant Vice President, Product Development, B2R Finance
Deciding what to charge for rent is no simple matter, but there are steps you can take to ensure you are charging the fair market rental value for your area.
If you charge less than the fair market value, you likely will have more prospective tenants wanting to rent your place. That can be good, but charging below market rent also means leaving money on the table while creating more work for yourself with more prospective tenants to screen.
Meanwhile, if you charge too much, you may have the opposite problem with no tenant interest or very few tenants to pick from.
The best scenario is to price your property at what is considered to be the fair market rental value — the going rate. Achieving above market rents are a bonus if you can attain them.
First, take these three steps in preparation for setting the fair market value:
- Know your asset. Is it a three-bedroom, two-bathroom house? Is it a condo with a water view? Is it a duplex? Have a good understanding of its size, age, condition and amenities. Also think about whether you or the tenant will pay utilities, who will maintain the yard, and whether pets will be allowed.
- Ask yourself if the property conforms to the neighborhood. A conforming property — one that is similar to others in the neighborhood — is likely to garner a higher rent than a nonconforming property, unless that nonconforming property is a shiny new high-rise condominium. If everyone in town is living in a three-bedroom, two-bathroom house, you’ll want your property to be similar.
- Understand what drives rent. More bedrooms garner a higher rent. A single-family property with a yard and garage commands a higher rent than an apartment unit with the same number of bedrooms. A condominium typically rents for more than an apartment, as the investor will include HOA fees as part of the rent.
Next, you’ll need to investigate the monthly rent for other similar properties in your neighborhood. Unless you are an institutional investor, you’ll likely use a manual method to determine fair market rental value such as the one described below:
- Do online research. Look at sites such as craigslist.com, rent.com, Zillow.com and local online classifieds for properties located near your own and find out what they are renting for.
- Use word of mouth. Ask people you know who are renting what they pay in rent. Stop by or call properties where there is a “for rent” sign outside.
- Consider an appraisal. You can hire an appraiser to prepare an opinion of market rent for your property. Just as an appraisal for a property sale looks at what comparable houses are selling for, an appraisal for rental value will look at what comparable properties are renting for. Be aware that you will pay a nominal fee – typically between $60 and $150 – for this service.
- Consult a real estate professional. Besides selling properties, some real estate brokerages also place tenants into rental properties. They’ll have access to the multiple listing service and will be able to research property values and rental amounts. They should have a good idea of the fair market rent for your area. Expect to pay a fee for this service.
- Consider lease terms when making comparisons. Landlords typically provide a discount for a one-year lease and charge more for month-to-month or six-month leases.
- Research the pros and cons of Section 8 housing and decide whether your rental will be open to Section 8 tenants. Section 8 is a federal government housing assistance program.
Determining fair market rental value is an exercise in understanding your asset and comparing it to similar properties. Once you do your homework, you’ll be ready to set your own rental rates based on fair market rental value.
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.
The information on this page is provided for informational purposes only and does not constitute investment, real estate, or legal advice. This information should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. No representations or warranties whatsoever, express or implied, are given as to the accuracy or applicability of the information contained herein. The information may be modified or rendered incorrect by changes in the marketplace or developments in the law, or for any other reason, and may not be applicable to any individual reader’s facts and circumstances.