Are you having trouble renting out your vacant units? One of the mistakes that first-time landlords make is putting a price tag that’s too high on their rental properties. Although your goal is to profit off of your South Florida residential rental property, you shouldn’t set an unreasonable rate, either. Setting a price that’s too high won’t get your units rented out.
Well-versed property investors and property management companies know that rental properties should be priced according to the fair market rent. From the word itself, your rental rate should be fair in order to attract potential tenants. If this is your first time to hear about the term, read on to find out what fair market rent is, as well as how you can calculate it accurately.
What is Fair Market Rent?
Fair market rent (FMR) is the amount of money that a particular type of property will generate over a given period. The FMR is estimated by the U.S. Department of Housing and Urban Development (HUD) as it reflects how much renters in an area can currently afford. It is also based on the amount that other tenants are paying for similar rental properties.
The FMR is important as it sets the baseline for the Housing Choice Voucher Program or Section 8, which is a governmental program that assists individuals that need financial aid. Section 8 gives these individuals vouchers to be able to afford a rental unit. Individuals that are eligible under Section 8 can use these vouchers to pay for their rent in part or in full.
If you encounter a tenant with a voucher, you may not be able to turn them away. While the Fair Housing Act (FHA) does not bar you from refusing these types of tenants, don’t forget that your state can create stricter regulations against discrimination. Consult a property management company to be sure.
What is the Current Market Rent?
The current market rent is not the same as the fair market rent. The current market rent is how much a particular rental property can go for in the open market. It isn’t uncommon for the current market rent to be higher than the fair market rent, as it isn’t affected by factors such as location and postal code. For instance, a three-bedroom home can have a fair market rent of $1,500 and a current market rent of $1,800.
How Can You Determine the Fair Market Rent?
You can check the HUD to determine the fair market rent. Keep in mind, though, that their calculations may not be accurate, as conditions vary by neighborhood. Find out what other property owners are charging their tenants for properties that are the same as yours. Some websites like Zillow and Realtor.com allow you to calculate the fair market rent by comparing your rental property to similar for-rent properties. Whether you use a website or conduct a real estate analysis, remember that the closest the comps (comparable rentals) are to your property, the more accurate the rate can be.
Alternatively, consider consulting a rental property management company. Thanks to their knowledge of the local market, they can calculate the market rent more accurately.
Why Do You Need to Determine the Market Rent?
Want to ensure that your real estate investment is actually lucrative? Charge the correct rent. By knowing the market rent, you can make sure that your rental property is continually occupied. If your rental unit is correctly priced, you can rent out your property in no time and earn a decent amount of money. If your rental unit is too pricey, you won’t be able to attract tenants. You will lose money since you still need to pay for insurance, loans, and other costs related to property management.
Determining the fair market rent can also help you decide whether or not to raise (or lower) the rent. If you’re considering raising the rent to offset your costs (e.g. utilities, mortgage, etc.), that may not be the best option. If you put a price that’s more than the market rent, you’ll likely have a hard time looking for tenants.
In addition, knowing the fair market rent can help you decide if you should purchase a particular property. If the market rent is less than the operating costs, you should think twice about buying it — it’s unlikely to make money.
What Factors Affect the Rental Rate?
The rental price of your property is affected by the following factors:
- Is your rental property in a good neighborhood? Is it in a desirable school district? Is the crime rate low? If you answered yes to any of these, chances are that you can charge higher.
- The number of bedrooms and bathrooms. The more rooms your rental property has, the higher it can go for.
- Greater square footage equates to greater rent.
- If your investment property has amenities that other properties don’t have, such as a pool, central air conditioning, outdoor spaces, etc., you can charge higher. Your rental rate can also be higher if your unit boasts brand-new upgrades.
- Demand. If your property is in an area where the rental demand is low, you’ll have to lower your rental rate to attract tenants.
- By allowing pets into your rental property, you can charge higher rent as you’ll also have to collect a pet fee. Not sure if you should allow pets into your rental unit? Read our guide on renting to pet-owning tenants.
The Bottom Line
Knowing the market rent is the key to your success. By basing your rental price on the market rent, you can make sure that your investment properties don’t stay vacant for far too long, and that you can get your units leased in no time.
Luxury Property Care is a full-service property management company that helps South Florida investors earn more from their investments. With us by your side, you can correctly — and competitively — price your investment property so you can finally live the life you’ve always wanted. Call us at (561) 944 – 2992 or complete our contact form for more information.