One of the main reasons why many rental property owners find it challenging to see profit in the rental venture is their inability to calculate the fair market rental value for a unit. They often overestimate the value and sometimes undercut comps, none of which is ideal for owning rental units. So, today, I’m going to talk about calculating fair market rental value and discuss some of the factors that affect it.
What is Fair Market Rental Value?
Fair market rental value or fair market rent (FMR) is the amount a tenant is expected to pay the landlord for a unit. Similar to how the value of a property fluctuates over time, rent in a neighborhood also changes depending on several factors and to succeed with rental properties, it is crucial for homeowners or landlords to know how to come up with fair market rent for the said unit.
Factors to calculate Fair Market Rent (FMR)
Calculating fair market rental value is not that difficult if you have the patience, resources and tools to check out comps. Comparative properties or comps refer to the properties that are similar to the property in consideration.
By researching comps in the neighborhood, landlords or rental property owners can calculate a rent that is fair for the renter based on the current market. Here are few factors that need to be taken into consideration when calculating Fair Market Rent using comps:
- Bedrooms & Bathrooms
The first thing you’d want to look at when considering comps to calculate FMR is the number of bathrooms and bedrooms. If you are calculating FMR for a 3-bedroom and 2-bathroom unit, the comps you need to look at should also have 3 bedrooms and 2 bathrooms.
- Unit type
As long as you are comparing beds and baths, you need to make sure the property you are comparing is also the same type of unit that you are renting. If you are renting an apartment with 2 bedrooms, you should compare it to other 2-bed apartments.
- Indoor & outdoor area
When comparing other rental units to calculate fair market rental value, the indoor footage and outdoor acreage should be taken into account. Sometimes the same number of bedrooms and bathrooms doesn’t paint the whole picture. If a rental unit has 2 bedrooms and no yard, to accurately determine what the rent should be, the unit must be compared to a property with no yard. If you put the 2-bed zero-yard unit against a 2-bed huge-yard property, it won’t be a valid comparison. Similarly, besides ensuring the comps have the same number of bed-bath and yard or outdoor space, it is also essential to consider the size of the rooms.
- Neighborhood & Amenities
A 2-bed apartment in a good neighborhood should be compared to another 2-bedroom apartment in a similarly decent neighborhood. Remember, people don’t pay for the square footage or bedrooms only; they also pay for the neighborhood and amenities like central heating and cooling, pool, dryer, washer, etc.
