How to Determine the Fair Market Rent for Your Rental Unit

By: ROS Team July 29, 2021

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Calculating the fair market rate is critical to your success as a landlord. Your rental income must be sufficient to cover the mortgage, property maintenance, and any other operating expenses. Finding tenants for your vacant apartment units won’t be a challenge if you price the unit correctly. Pricing a unit too high, on the other hand, may discourage potential tenants.

Real estate market projections set the tone for most rental rates.

This article will help provide insight into how you, as a landlord, can calculate fair market rental rates by zip code and tips for how to estimate fair market rent values based on the present state of the real estate market.

How is Fair Market Rent Calculated?

To determine fair market rent, several factors must be considered. One factor is the fair market rent that HUD sets.

Fair Market Rent Calculated

This is the rent rate used to determine whether someone qualifies for public assistance. It considers the rent itself and any other utilities for which the tenant would be responsible, such as gas or electricity. It does not cover utilities like telephone service, cable, or internet.

HUD’s fair market rent uses census data and tenant surveys to determine statistics for different areas. HUD compiles these statistics, specifically the local rental rates every year.

How is Fair Market Rent Used?

A fair rental value calculator is used to calculate rental voucher values issued for government housing assistance programs like Section 8.

Example:
In 2021, the fair market rent for a two bedroom apartment in Newark, New Jersey, is $1,643. In the same year, the fair market rent for a one bedroom apartment is $1,358.

How to Assess Fair Market Rent Before Listing a Vacant Rental Unit?

Listing a Vacant Rental Unit

Before listing a vacant rental unit, you must know the FMR rate and study the fair market rent calculator. This tool will help you set the You will locate a new tenant soon if you set the correct rent price. After you set an acceptable price for rent, you have a better chance of the tenant staying long term.

To figure how much rent to charge, you can use nearby property comps and use the average percentage increase. Proximity to shopping centers or schools increases a property’s market value. Another point to consider is the current rental rates by zip code. This may be greater than the fair market rate.

What Is Section 8?

Section 8 is a federal assistance program that helps subsidize the cost of renting an apartment for selected individuals. Eligible tenants receive housing vouchers through the program. To qualify for a voucher, the tenant’s annual income can’t exceed a certain threshold depending on the number of people occupying the property.

What Is Section 8

Landlords who participate in the Section 8 program are subject to regular inspections to ensure the property meets specific housing standards. If the landlord’s property passes the inspection, they will be compensated directly by the Section 8 program each month.

Finding Section 8 Apartments
How Do You Qualify for Section 8 Apartments

How Much Will Section 8 Pay the Landlord?

Section 8 will calculate the voucher amount depending on the number of people who will occupy the unit. This information, in turn, will determine the unit size the tenant will qualify for under the housing program a family of three, for example, may be eligible for a two bedroom apartment voucher.

Section 8 Pay the Landlord

A unit’s fair market value will vary depending on the part of the country in which it is located. Section 8 will calculate the amount of a voucher issued in that region based on the fair market rent charged in that location. The voucher may not cover the total rent amount; if that’s the case, the tenant may still be required to pay the difference.

How to Determine the Maximum Section 8 Rent

The fair market rate is necessary to determine whether a property qualifies to participate in the government’s rental assistance program. The maximum rent that you set for the property can’t exceed the local average rental price.

It can be advantageous to rent to low-income tenants if the fair market rent is higher than the market rent. However, it is recommended that you first consider the advantages and disadvantages of having Section 8 tenants in your buildings.

Setting up the Right Price for Your Rental

There will be a maximum rental amount that you can charge based on several different factors. These may include the following:

  • Location: Rent is heavily influenced by where the property is located. You can charge extra if your property is located in a popular part of town or if it’s in one of the city’s best school districts.  A fair market rent calculator is a great tool that can help you identify the ideal rent rate. Two properties located only a few blocks from one another can demand significantly different rents because of their locations and nearby amenities.
  • Size: You will be limited to a maximum rate based on the property’s square footage and the number of bedrooms and bathrooms in your property.
  • Amenities: If your property features a spectacular view of a popular part of the city, has a large backyard, or was recently renovated, you may be able to charge a premium rent rate.
  • Demand: If there are other vacant apartments in the area and little or no demand,  you may need to consider reducing the property’s rent amount. You can use a fair rental value calculator to determine the rents of the available apartments in the area and compare them with yours.

 

To be a profitable landlord, accurate rent calculation is critical. It’s crucial to know your local rental rates in the neighborhood where your property is located because it will help you earn a higher profit. To increase the number of long term tenants and maximizing your profit, you’ll want to invest money in your property for proper maintenance, and you’ll benefit from steady cash flow.

Final Thoughts

Pricing your rental appropriately might be pretty challenging. It is a trial and error process. Identifying at least three properties in your region comparable to yours can assist in determining the fair market rent.