How to Determine Fair Market Rent on Residential Investment Properties
By Kerry Curry, Contributing Writer
A great deal hinges on setting fair market rents on residential investment properties, not least of which might include obtaining financing and securing tenants.
The goal is to hit the sweet spot: A rental rate comparable to similar residences in your neighborhood that takes into account amenities specific to your property.
If you are off the mark, it could materially affect the amount of financing you are able to obtain on the property. Your lender, after all, will be doing its own assessment of market rent, especially if they will be lending based on the property’s cash flow. Can your property command the rent you’ve established?
Even if you aren’t seeking financing, setting the rent too high or too low can be detrimental in other ways. Rent that is too high can result in your property sitting vacant longer than it should. Rent that is too low means you are leaving profits on the table.
What affects the fair market rental rate?
To set market rent, you’ll want to take into consideration the number of bedrooms and bathrooms, the age and condition of the property, and amenities such as a garage, pool, or storage.
You’ll also want to assess the neighborhood, as real estate is all about location, location, location. A property on a quiet street that is close to a grocery store, a major employment center or a good school will be able to command a higher rent than a property that has none or very few of those amenities. Properties with convenient access to public transportation, especially in the nation’s large cities, will usually command a higher rent than those with less access.
How to determine what rent to charge
To determine what rent you should charge, you’ll need to do some sleuthing.
Large institutional investors and mortgage lenders often tap a professional database service to do the sleuthing for them. These companies will look at historical rental data in your submarket, forecast rental trends and pull comparable properties to come up with the fair market rent.
Investors who are not at the institutional level are more likely to tap a local real estate agent to assist them. A real estate agent will be able to review the local MLS and let the investor know what comparable properties are charging in rent. A realtor will also have the ability to pull historical data that allows an investor to look at trends.
The investor should also call any rental signs posted in the neighborhood and review rental listings such as those on Craigslist or in the local newspaper to find comparable properties and their rental rates.
It’s important to note that market rents aren’t static. Just because your property rented for $2,000 per month a year ago, doesn’t mean it’s worth that today.
If a big new employer has moved in nearby, you may find that you can and should raise your rent.
However, the reverse may also be true. If the local economy is under stress, you may need to lower your rent. Or, your older property could be facing competition from new residential construction that may require a lower rent.
Do your homework to have the best shot at hitting the market rent sweet spot: a rental property that will maximize profits — and attract tenants.
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.
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