When setting rents for an income property, how can a landlord know whether or not it will be competitive with similar nearby properties? If you set the rent too low, you run the risk of losing money; too high, and you could have a hard time filling vacancies.
Fair Market Rent (FMR) is set by the U.S. Department of Housing and Urban Development (HUD), and is based on what a household can expect to pay in a given area for a non-luxury rental unit. Efficiencies, one-, two-, three- and four-bedroom units are included in the FMR listings, which are revised each year. FMRs are set at the 40th percentile of gross rents, which is the point at which 40% of rents are below or equal to, and 60% of rents are greater than or equal to.
Landlords might use the HUD’s FMR when dealing with Section 8 tenants, or to see where their rent stacks up against the government’s estimate. Keep in mind that this figure is going to be set among the lower half of average rents, and also that gross rent includes utilities paid by the tenant.
“Market rents” refers to the going rate for rental properties in an area. As in any other venture, rates are often dictated by what the market will bear. In times of low vacancy, when rental properties are harder to come by, tenants will often pay higher rents. When the rental market is struggling, and tenants are harder to come by, rents tend to go lower as landlords compete for the best tenants.
It’s always a good idea to know where your rents fall in the spectrum between “too high” and “too low.” Here are a few ways you can figure that out:
- Check Craigslist. Scan the online classified ads site for properties with the same number of bedrooms and bathrooms as yours. Check square footage, neighborhood and amenities that are included, such as fitness rooms, swimming pools or free WiFi.
- Conduct Some Drive-Bys. Drive around your area and look for “For Rent” signs. Call the number, inquire about the rent, ask about the size and what’s included. If you really want to see how your property compares, schedule a viewing of the property.
- Call Property Management Companies. They will have lots of information about rentals in your area. Tell them what you’re looking for (a rental that compares with yours) and find out how much they’re leasing them for.
- Go Online. Zillow, the real estate valuation site, has a “Rent Zestimate” for every property. Simply enter the address, and see what the algorithm comes up with. Rentometer also compares rent rates, as does Rent Jungle. Enter the address, rent amount and number of bedrooms, and it will tell you whether it’s too high or low.
It’s a good idea to check market rents on a regular basis. You don’t want to find out your rents are out of line by leaving money on the table or staring at vacant units!