A key factor in keeping a property rented and profitable is learning how to determine fair market rent (FMR). Unfortunately, this is an area where many landlords falter. Generating cash flow means your rental income should be high enough to cover operating expenses and still make you a profit. But many new landlords don’t know how to price their properties, and either over or under-change. Both have their drawbacks.
What is Fair Market Rent?
When you shop for a specific product, you’ll notice that similar products are priced by the amount of money people are willing to pay. Prices may vary by $10-$20, but typically, there is an average price. Rental housing works much the same way. When tenants search for comparable properties in your neighbourhood and surrounding neighborhoods, they will see the average rental rates or fair market rent.
Think like a tenant
To help you get into a tenant mindset, when you were a renter, looking for a place to live, what was your criteria? I’ll bet you started with price and neighbourhood, then drilled down to the nice-to-have features and benefits like underground parking, an exercise room, a backyard, etc.
Pricing your property correctly translates into tenants considering your rental price as acceptable, which makes it easier to rent.
Unless your rental property has a feature that makes it more valuable than comparable properties, overpricing makes it much harder to find and keep tenants. Underpricing your property could get your property rented quickly, although you may not have the best tenants to choose from, and it may not cover all of your operating expenses, so you may have to cough up the difference.
How to determine Fair Market Rent
How can you determine a fair rent? Start by searching popular online rental platforms in your area. In Alberta, tenants search for rental properties in Facebook Marketplace, Rentfaster, and Rentboard. Rentfaster and Rentboard have search filter features that allow seekers to filter by neighbourhood, price, number of bedrooms, bathrooms, etc. They even offer an overview of average, lowest, and highest rent by property. By running a search, you will get a snapshot of fair market rent for your property in your area.
If you have a good relationship with a realtor or property manager, they can also be a good source of information for fair market rent.
When advertising your property, a good rule of thumb is to set a price and see what response your ad attracts. If lots of people look at your ad but, no one is calling/texting for a viewing, consider dropping the price by $50. If you’re getting too many calls, you may want to raise your rent by $50 or $100.
What factors determine fair market rent?
Rent can be determined by considering several factors, including:
- Location: Rent prices vary based on the location, and the fair market rent for a particular area can be found by looking at rental listings in the same area.
- Size and type of property: Rent prices also depend on the size and type of property, such as a single-family home, apartment, or condominium.
- Amenities: Properties with more amenities such as a pool, gym, furnished, or in-unit laundry facilities typically command higher rents.
- Economic factors: Rent prices are also affected by the local economy, including job growth, income levels, and demand for rental properties.
- Comparison with similar properties: To determine the fair market rent for a specific property, it’s helpful to compare it with similar properties in the same area that have recently been rented.
The more desirable features your property has, the more you can charge, and the more tenants are willing to pay.
Determining fair market rent for your property will take a little research, but it’s well worth the time spent. Pricing your property correctly attracts long-term tenants, covers operating expenses, and generates a profit.
What is your opinion on how to determine a fair market rent? I’d love to hear about it.
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