How to Determine Fair Market Rental Value
Part of becoming a successful landlord is learning how to determine fair market rental value for your properties. It is one of the reasons why new landlords fail. If your property is priced too high, you will have a hard time getting it rented. If you price your rental too low, you most likely won’t be getting phone calls from the tenants you would want to rent to.
It’s important to know how to figure out the fair market rental value of your properties. The best in the business know that if you can find the right balance among pricing your rental, offering the right amenities and keeping vacancy rates low, you’ll find yourself with a very profitable portfolio.
What does Fair Market Rental Value Mean?
The fair market rental value of property is what tenants are willing to rent similar property for in a specific area at a given time. In other words, how much is other rental property renting for around where your property is located that has similar characteristics to yours.
Fair Market Rental Value Factors
Fair market rental value takes a few factors into consideration. When analyzing how much you should charge for rent, you should consider:
- Number of bedrooms and bathrooms
- What is the size of the property? (square footage)
- How old is the property?
- What kind of property is it? Apartment? Home? Duplex?
- Does it have any cool amenities such as a pool, gym, air conditioning, terrace space, nice views?
- Is the property in good condition? (Walls, plumbing, electrical, flooring, etc.)
- Is it in a desirable location? For example, are there any decent/good schools in the area? What is the crime rate like? Are there plenty of public transportation options? Parks? Library?
The rule of thumb is: the more people that want to rent around where your property is located, the more rent it could yield.
Why is Fair Market Rental Value Important?
There are a number of reasons why you would want to know how to determine the fair market rental value of your property.
Adjusting Rent After Tenancy
In California, there are a number of local/municipal and state rent control regulations to consider, such as AB 1482. They limit how much you can raise rent for a given time during tenancies.
It’s not unusual for landlords to research fair market rental value of their property after a tenant moves out to raise the asking price. This is especially true if the surrounding area value has exceeded the allowed annual raise and the rental hadn’t been vacant for several years.
It’s important to do your research, find comparable property like yours using the factors listed above and adjust your rental rate accordingly. If you are way above the average, your property will sit vacant for months and months. If you price it just right, however, you’ll most likely find great tenants with long vacancy rates.
You should avoid getting desperate at all costs and offering your rental way below market value since this can attract bad tenants and you’ll most likely struggle to maintain positive cash flow.
Annual Rent Increases
Again, keeping AB 1482 and other local ordinances in mind, you are allowed to raise your rent every year. It’s a lot easier to raise rent once or twice a year at smaller increments than once every 2 or 3 years. It is especially easier if you mention these rent raises in your lease up front.
When it comes time to raise rent, it’s not a good idea to automatically raise the legally allowed amount. Instead, do your research again to stay within the fair market rental value of your property’s location. You don’t want to raise your rent to unreasonable amounts and have your good tenants move out.
When Considering New Investment Opportunities
Many landlords automatically look for how much a certain investment opportunity is currently charging for rent but fail to research fair market rental value. Doing this will tell you a bigger picture about the opportunity.
Maybe they hadn’t raised rent for 10 years? Maybe a very similar rental house has granite countertops but is fetching an additional $200 dollars worth of rent? These are all small details you can consider before pulling the trigger or not on an investment opportunity.
HUD publishes what they consider fair market rents on a per county basis. They use this to determine how much of the tenant’s rent the housing voucher would cover. If you have tenants that receive Section-8 benefits, it is imperative that you know how to determine fair market rental value
How to Determine Fair Market Rental Value
It all starts with due diligence and figuring out which tactic works best for you. There are a few ways you can determine fair market rental value for your property.
Using HUD’s Website to Determine Fair Market Rental Value
The first and easiest method is by heading over the HUD website and finding the county where your property is located and using the number HUD offers.
It’s a good starting point and you can use it to get a very rough idea.
In the example above, you’ll see that it only offers pricing based on the number of bedrooms. It doesn’t take any of the other factors into consideration such as amenities or condition of the property. Bakersfield county is a pretty big county! An apartment near a good elementary school might fetch a few more bucks than an apartment that isn’t.
Use Rental Comp Services Like Zillow, Rentometer
There are plenty of rental comp services on the web which can tell you how much a specific rental property can rent for. They can be a good idea to use to get a quick reference or a jumping off point but can be limited on knowing the exact factors that drive the potential price of a rental up or down.
Do your Own Research
If your time allows it, it’s always best to do your own research and diligence. This is the only true way you can get a real fee for determining fair market rental value for your property. Look up for rent listings near your property. Drive around and take notes of vacancies and call to get more information. Don’t forget to consider the factors that determine fair market rental value and to compare similar properties to yours.
You can embrace technology with this method as well by visiting classified ads websites such as Craigslist. Finding comparable property to yours within the same general location can be easier with these types of websites.
Doing your own research can also be a way to just confirm what your other methods have found. If you used HUD’s fair market rent and then went on to zillow to find the estimated rental rate, you now have a pretty good idea on what you can charge for rent after you’ve done a bit of research on your own to confirm the other method’s findings.
How do you find the fair market rental value of your properties? Most landlords use this approach to price their properties and you should too! It’s a time proven way to keep rentals rented to good tenants!
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