How To Determine Fair Market Rent for a Property

by Julie Broad

Finding the Fair Market Rent Rate is a Balancing Act

One of the most important things you can do before you buy a property – and then again at any time you find yourself putting tenants in that property – is estimate the rent rate you can charge.

If you set the rent too high you’ll have trouble finding and keeping good tenants but if you set it too low you’ll be leaving money on the table that could have been profit for you!

So how do you make sure the rent rate you think you can charge for a property is fair market rent?

First of all … you need to look around the area.

How much do similar units rent for in your neighborhood?

You can do most of this research from your home … although you’ll have a better sense of the area and the rent rates if you actually walk around

But first thing… go online and check the local online postings for places for rent:

There are tons of websites have local apartment and houses for rent. Do a quick Google search for your area to find the ones that are most used in your area and then check out what is on the market and at what price.

Next walk around the area of the property.

Look for “for rent” signs. Pull out your cell phone and call them and find out what they are offering. Find out what amenities they mention first.

If you don’t want to call then and there write the number down … or even better take a picture with your phone so you have the number on the sign and what the property looks like.

In many areas it’s still worth picking up a local newspaper to see what is advertised. These days it’s mostly just professional property managers that still use the paper to advertise unless there is a good quality online classified ad section that goes along with the newspaper ads. We test it out every once in awhile and just find that we pay a lot for very few leads … with online ads we pay almost nothing and get dozens of great prospects.

Finally, ask people who are area specialists.

We ask realtors and property managers we know. Most of the time they both can tell you, for example, what a 2 bedroom condo will rent for in that area or a 3 bedroom home

Now… before you rush out thinking the property can be rented for the average rent rate in the area you need to determine specifically WHY properties rent for what they rent for.

First of all … make sure you are comparing properties of the same size. Find out the number of bedrooms, bathrooms, availability of laundry, parking and other important features tenants ask about. Then find out more specifics like the exact location of the property relative to transportation options and shopping. Also compare the exact size … if you compare a 600 sq foot 1 bedroom plus den property to an 1100 1 bedroom plus den property you aren’t comparing apples to apples.

Specifically take into account:

  • Location of the property in proximity to amenities like schools, shopping & recreation,
  • Square footage,
  • Number of bedrooms,
  • Number of baths,
  • Utilities included or not?
  • Availability of a garage or covered parking?
  • Amenities included like a washer/dryer, yard, storage space, deck, fireplace?
  • Are pets allowed?

Once you have done all of this you should have a very good sense of your rental market area and the average rent rate so you’re ready to set the rental price.

Determining a fair rental rate can be a tricky task though. Too high and your unit sits unoccupied; too low and you’ve lost vital income.

In general, you want to be in the middle of your neighborhood’s rental range.

Knowing the average rate and what similar properties rent for will give you a good idea of what you can charge. It’s also a good idea to have the sense of the local competition and how many units are available for rent on the market. If the area market is flooded with available rentals, you may have to lower your rent to draw tenants. If the rental market is tight then you can probably go for a slightly higher rent.

This will help you know which direction in the range you need to go, but  what if you’re not sure?

You can always test the market. Your gut feeling about the rent you can charge at this point is probably right but you can always put an online ad out there on the high end of what you think you can get.  If you decide to do this you have to react quickly … you want to make sure you rent your property quickly so drop the rent quickly if you haven’t started to receive responses within 48 hours… and drop it by at least $50 to make a difference in the responses you are getting.

Check out renting your property for more tips on property management and landlording.

16 Comments

Filed under find tenants, Property Management

16 responses to “How To Determine Fair Market Rent for a Property

  1. @chrislemay on Twitter just mentioned that you can also ask an appraiser. They will usually let you know what economic rent is for about $60 or so. We always get economic rent included in appraisal reports – lenders want to see it on rentals!! Thanks!!

  2. Hi Julie,

    Nice article!

    You covered a great point when you mentioned to walk around the area and look for for rent signs. Calling the landlords of these properties can give you a good idea of the market rents for that area.

    Another method that often helps is when you invest in an area, in which you know a lot of other investors investing in the same property type.

    When I first started out, that is how I came to learn the market rents. I knew several investors all investing in the same property type in the same area of town. As a result, I learn what the market rents were quickly by speaking to them.

    Keep up the great work!

    Regards,
    Neil.

    • Great point Neil!! We always encourage people to attend their local real estate investing club meetings and that is a great place to ask about the rents they are getting for different property types. And these days with so many investor forums like REIN has for its members and Bigger Pockets there are probably plenty of opportunities to ask investors in your area without even leaving your house!!
      Thanks,
      Julie

  3. jack welder

    Fabulous article… I was searching on the internet for a resource to help me figure out how to rent out our basement suite and found you. I am so glad I did. This looks like an amazing website.

    • Thanks Jack!! We’re happy you found us too. If you have questions about renting out your basement suite please do let us know. You can also check our website: http://www.revnyou.com as we have tons of resources and articles that will help you out as well.
      – Julie

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  5. Veeery clear article!
    You summarised almost everything needed for successful renting your property. But there is one more important thing you didn’t mention, which every tenant should take into consideration, and so that biggest problems arise when tenants raise the rent but don’t put anything back into the property.
    So be careful!
    Regards,
    Julie

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  7. Hi,
    I would like to correct one mistake I made in my previous comment…..it is, of course, not the tenant who rises a rent. I meant landlords, who are doing so.
    So, have a nice day!
    Julie

    • Thanks Julie. I figured that is what you meant but I am glad you clarified. If you take care of the property I don’t think there is a need for a quid pro quo type arrangement. In other words, there is nothing wrong with raising the rents without a corresponding property upgrade (assuming you are allowed to raise the rents in your state or province – we have to abide by the rent controls that dictate when and how much we can raise rents by). The reality is that expenses are always increasing. Taxes, insurance and utilities almost always rise … and as a landlord there is no reason why you should have to bear all of these rising costs on your own. Not sure if that is what you meant or not…

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  9. Quite a few useful items of information at this site, thanks very much!

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