If you’re new to buying investment properties to rent out, one of the fundamentals to understand is how to calculate fair market rental value. Basically, this just means how much the ideal monthly rent is for a property.
If you charge more than fair market rental value, you’re likely to have difficulty finding tenants and excessive vacancy. Generally, this more than cancels out any extra income earned from charging such a high rent.
On the other hand, if you charge below fair market rental value, you’re missing out on income you should be making. This undercuts your profits, and may even prevent your investment from actually achieving profitability.
This is why it’s essential that you know how to calculate fair market rental value. It’s one of the keys to success as a real estate investor. It will also help you in deciding which properties to purchase, how much to invest in upgrades and renovations, how to handle lease renewals, and more.
Also, keep in mind that fair market rental values can fluctuate. They may rise or fall as much as 5, 10, or even 20 percent in a year or two. Here are some things to think about regarding rent increases for those times when you’re considering them.
Looking at Comparable Properties
The most important step in calculating fair market rental value is finding out how much tenants pay in comparable properties. Comparable properties (or “comps”) are just what they sound like: properties that are similar to yours.
Of course, it’s not a black-and-white matter. There’s probably not a property that’s identical to yours right next door. So, it’s a matter of finding the most similar properties as close by to yours as possible.
Major factors that make properties comparable include:
- Being in close proximity to each other
- Being in the same neighborhood/on the same or similar blocks
- Same home/unit type
- Same number of bedrooms and bathrooms
- Similar square footage
- Similar appliances, features, etc.
- Similar updates
- Similar yards/outdoor space
- Similar building amenities
- Similar parking situation
If other properties you’re comparing differ in some of these respects, these differences increase or decrease the rent that can reasonably be expected.
Determining Rents on Comparable Properties
Research begins on websites like Zillow, Trulia, Apartments.com, and the local Craigslist. Also, drive around the area of your investment property to get a strong sense of the neighborhood, street, and block where comps are located, and how they compare to where your property is located. Look at the exterior condition, too. When possible, take tours of comps as well so you know exactly what they have and what they’re like on the inside.
Tools That Help Estimate Fair Rental Rates
There are online tools that estimate fair market rental value, too. These should only be used during initial research, and only as a general guide, though. They’re based on imperfect algorithms using incomplete data, so don’t rely on them for definitive answers. A few reputable options are Rentometer, Mashvisor, and RentRange.