To have enough money to pay the mortgage, maintain your property, and make a profit, you have to set your asking price just right. However, you can’t just tack on random numbers. Too high, and you’ll risk losing out on tenants. Too low, and you won’t make enough money to cover expenses. To find that sweet spot, learn how to determine the fair market rent for your property.
What Is Fair Market Rent?
Fair market rent (FMR) is the amount of rent a property should receive in a particular area, depending on its characteristics. In simpler terms, it’s a statistic that tells you the ideal amount of rent you should charge. Without this number, it becomes impossible to accurately determine rental property cash flow. If you don’t know how much you’ll charge, you can’t subtract reoccurring expenses, and if you can’t subtract these expenses, you can’t tell whether a property will be profitable. Ideally, you’ll crunch all these numbers before you buy a property so you can nail the asking price and ensure a profit long before your first tenant.
What Influences Fair Market Rent?
Before we can determine the fair market rent for a property, we first must look at the factors that influence it. This is a critical step in the calculation process. The three main factors that influence FMR are location, property condition, and property types.
If your property is in a desirable area and is in good condition, you’re already on the upper end of things. Property type, however, is a little more complex. For example, the FMR for an apartment will be lower than a single-family home due to other influencing factors like privacy, convenience, and overall space.
Other factors that influence FMR are the overall square footage of the property, the number of bedrooms and bathrooms, and the amenities you offer.
How To Calculate Fair Market Rent
Because so many factors influence FMR, you have to calculate it for every individual property. There is no one-size-fits-all calculation.
First, you’ll want to find three to five properties near your area that are as similar to yours as possible, keeping in mind bedrooms, bathrooms, location, and other influencing factors. Once you’ve researched the market, take the pricing of these properties, and find the overall average. You’ll then want to adjust this number based on the things that make your property stand out or things the other properties didn’t have. For example, if your property has a pool and is close to a local mall or school, you can increase your FMR for amenities and convenience.
Once you’ve determined the fair market rent for your property, you’ll have an easier time making a profit off your rental income.