As people, we have basic needs, such as proper shelter. However, on any given night, there are more than 771,000 people in America who experience some form of homelessness. To improve those numbers and limit the number of people without a roof over their heads, there must be fair market rent. The term “fair market rent” is utilized by both private landlords and government-funded programs. Therefore, it’s considered on a daily basis within the real estate industry. In this article, we explain the fair market rent for both private rentals and government programs.

What is Fair Market Rent?

As we briefly mentioned above, fair market rent covers government rentals as well as private rental properties. When discussing the private rental industry, fair market rent refers to a monthly rental rate comparable to that of similar properties in a neighborhood. Furthermore, the inventory and average rental rates dictate the market value. Therefore, if a landlord decides to request a monthly rent much higher than that of other properties, it may sit vacant. This can hurt the landlord in the long run because there are always some operating expenses, such as home maintenance, a mortgage, and taxes.

Additionally, within the real estate field, “fair market rent” refers to government-funded housing such as subsidized homes, HUD housing, or Section 8 housing. The rental rates for subsidized housing are capped at a specific amount to remain affordable for lower-income families. The guidelines stay the same, involving rent and utilities; the government can control housing rates. For example, Philadelphia outlines these rates: Studio apartment for $1,397, 1-bedroom for $1,520, 2-bedroom for $1,810, & 3-bedroom for $2,170. Which means the rent must stay below those numbers to remain “fair market rent”.

How is Fair Market Rent Determined?

When figuring out how fair rental rates are determined, it depends on whether you’re referring to government-based or private landlords. The U.S Department of Housing and Urban Development sets the standards for “fair market rent” involving programs overseen by the government. While the rental market determines what a landlord can request when discussing “market rent” for the private rental industry.

Government-Based FMR

The government has an equation used to calculate fair market rent. Therefore, they identify the 40th percentile of gross rents (including utilities) for standard rental properties. The exact amount issued to cover rental rates varies depending upon the state, considering the cost of living and overall income differ in each location.

Private Market Rent

When explaining private property rentals, the market directly dictates the rental rate. Below are some factors that play a role in determining rental rates with private landlords:

• Comps, also known as “Comparables,” refer to recently sold homes (usually within 180 days) with similar square footage, features, and condition that sold within a quarter mile of the home.
• Neighborhood demand: If the rental properties are in a desirable area with low crime, endless amenities, and excellent schools. Therefore, more individuals are attempting to live in that neighborhood, which drives rental rates even higher.
• Local Economic Conditions. What individuals and families can afford will impact the market rent. If the average income in that neighborhood is low, it’ll dictate more reasonable rental rates. Furthermore, if employment opportunities become limited, it can drive down rental rates, given that these individuals may be living on a tight budget.
• Vacancy rates. When there’s more housing inventory than renters, it’ll lower the rental rates since the landlord desires the monthly rental income.
• Property Condition and Amenities. The nicer the home, the higher the rental rate. Homes near stores, parks, restaurants, hospitals, and other daily amenities can lead to the area being more desirable, directly affecting the rental rates.

Factors that Impact Fair Market Rent

1. Location: The irony about most countries, you can find “slums” near luxury areas. Just within a few miles, the rental rates can differ drastically. Individuals are willing to pay a higher amount each month to reside in a safe and healthy community.
2. Property Characteristics: Just because two properties are located on the same street doesn’t always mean they are comparable. Some properties are larger than others; however, the characteristics like finishing touches and expensive material, make all the difference. Further features, such as a screened-in porch or a swimming pool, can go a long way when determining rental rates.
3. Market Conditions: Some areas are up-and-coming, some are established, while others are on the decline. Therefore, these factors can directly influence the rental rates. As mentioned above, to determine a proper rate, consider the recently rented comps and the direction of the neighborhood.

Why FMR Matters in Real Estate

• Landlords: Fair market rent matters involving landlords because it helps set standard pricing guidelines. Furthermore, landlords can leverage FMR to minimize vacancy rates, allowing for no or little overlap with tenancy.
• Tenants: Renters can benefit the most from reasonably set rental rates. It ensures the rents fairly evaluated, protecting the tenant from overpaying and essentially being ripped off. Saving on basic needs, such as shelter/rent, allows the individual to spend the extra money elsewhere or save up to purchase a house rather than continue to rent property.
• Government Programs: Allow any low-income, elderly individuals or families to receive assistance without any discrimination. Furthermore, these programs help reduce homelessness throughout America.

How to Calculate Fair Market Rent Rates

Step-by-step Guide to Calculate Fair Market Rent:

1. Research similar properties within a short distance that rented within the last few months. Determine the comps, aka comparables, which are properties with similar features, size, and condition.
2. Determine the average rental rate for those properties compared to your rental. It’s vital to note that if a landlord prices the rental rate above its value, the property runs the chance of sitting vacant.
3. Utilize online tools, such as websites like Zillow. Most of these online real estate platforms are free to use, and calculating FMR based on other rental homes in your neighborhood. If the process seems complex, don’t hesitate to hire a real estate professional familiar with rentals, such as a property manager or realtor.

Challenges Associated with Fair Market Rent

Although “Fair Market Rent” sets guidelines ensuring reasonable rental rates for all, there are some obstacles faced. In real estate, the market’s always shifting, leading to home values and rental rates constantly increasing or decreasing, making it difficult for a landlord to determine a fair rent between tenants. Another challenge is limiting these renters to certain areas, reducing the chances of the renter affording a place in an upscale or luxury neighborhood.

Furthermore, if a landlord wants to participate in a government-funded rental program, they will face the hassle of yearly inspections and lower revenue. Therefore, determining and following the rules of FMR can be difficult, but overall, it’s beneficial for tenants and landlords!

Final Thoughts: Rental Rates Affect Everyone

In the real estate industry, “Fair Market Rent” a valuable tool used by government programs, tenants, and landlords. FMR sets standards in a rental market, capping the required rent at a certain amount. Typically, the current rental market dictates the rent amount. Limited inventory with a high number of renters may drive the rates up, leading to low vacancy rates. While properly priced homes can keep a tenant in place with low to no overlap in tenancy.

Furthermore, there are tools and resources to help determine a fair rental price. For tenants and landlords to achieve the best results, consider working with a real estate professional. Therefore, property managers and agents have the knowledge to find a qualified tenant at the right price. If you’re looking for a fairly priced rental or assistance placing a tenant at fair market rent, fill out the form below or give us a call at 267-420-2296.