How do you set the rent amount? Setting fair market rents is one of the first challenges a new landlord has with their rental house. That is a complicated process, but the best property managers follow these steps.
- Find comparable properties in the same area., that are currently for rent.
- Reduce this list of comparables until it only includes properties with square footage and the number of bedrooms and bathrooms.
- Calculate the average rent for the comparables.
- Adjust rent from the average based on amenities that your property offers.
These steps are simple to follow, and the challenge comes from accurately identifying comparable homes. Identifying the correct comparables is an essential skill that you must cultivate to manage rental properties effectively. The article will explain the best way to find these comparables to find the rents that are charged.
What is Market Rent?
Market rent, as defined by Law Insider, is the amount of rent that can be expected for the use of a property in comparison with similar properties in the same area. This is generally considered the amount of rent qualified tenants are willing to pay and that landlords of comparable houses are willing to accept. The fair market rent will vary between cities, neighborhoods, and even by the block. The rental amounts also vary based on house size, bedroom count, and many other factors.
Why Should Landlords Know the Market Rent?
While it may be nice to get excess rent on your property, all your decisions should be based on the market rent. In exceptional cases, you may be able to get rent above the market rate, but you should never rely on this to make a deal work.
Initially, knowing the market rent will help you set the rent when advertising to new tenants. You don’t want to start with low rent and then need to raise the rent on existing tenants to cover your expenses. On the other hand, it will be challenging to find a tenant if you ask too much for rent.
Later, when you have a long-term tenant, knowing the market rent will help you decide if it’s time for a rent increase. If you arbitrarily raise the rent over market value, your tenants can find similar houses at a lower cost. This increases the chance that the tenant will leave, and you will end up with a vacancy. If you keep the rent artificially low, you may have problems paying the property taxes or making timely repairs.
In cases where you plan to charge more or less than the market rent, you must have a baseline from which to deviate. When analyzing the purchase of the rental property, you must know the market rent to forecast revenue. Market rent is one of the most critical metrics for a rental property, and accurately discovering market rent is a valuable skill for any real estate investor. In the end, if you can’t get the market rent, you’ve done something wrong. After all, by definition, market rent is the amount you can get.
How Can You Determine the Market Rent?
The goal of determining market rent is simple; determine what similar properties in your area are renting for. Determining the market rent is more complicated. You should be able to zero in on the market rent by checking other properties offered for rent. Don’t forget that it’s essential to use data from similar properties, not just any nearby homes for rent.
A good starting place for finding the market rent is Zillow, which uses an algorithmic approach to estimating rents. Put simply, this means using formulas and existing data to determine what the market rent should be. Zillow will attempt to calculate the correct rent amount but will also give you a range of rents based on its formula. Ocassianly this value is off because of external factors that the algorithm is unaware of. In rare cases, Zillow may not have a value, and you will need to use one of the other methods.
It’s simple to get the rent amount from Zillow. You type in the property address, and Zillow will show you the rent amount.
The Zillow rent estimation will give you a general idea of what similar houses rent for. It can be easily used to disqualify a property if the rents are far from what is needed for the deal to work. If the number is close to a deal, continue with the other methods to zero in on actual market rent. Keep in mind that sometimes Zillow is skewed by an outlier.
When you are new to an area, you should check the asking rent for other houses. This is simple to do online with tools like Facebook MarketPlace.
When using the Facebook marketplace, narrow the search as tight as possible. Sometimes a rental in the next neighborhood rents for many times what your target property will rent for. In addition, use the filter to ensure you look at similar square footage and the same number of bedrooms and bathrooms. Remember, comps are comparables, so you want to find the houses that most resemble your target property.
Other sites, like rent.com, apartments.com, and realtor.com, can provide a similar service. I suggest trying them all out; the more data you have, the more accurate your number will be.
Know The Area
The best way to know market rent is to understand the area already. It will take some time, but once you have done this for a while and have a few rentals in the same area, you will know what the rents are. Hopefully, you have followed my advice about getting the maximum rent and instantly understand what a house can get in the area you work.
If you come across a lead in an area where you have several rentals, you will already know the market and can make a purchasing decision faster. Soon you will get to the point where you don’t need to check the other sources. This is especially true when you already have similar houses with the exact bedroom/bathroom count and square footage. You can always use the methods above when deviating from your area, but investing in the area you know is the best way to know what you are getting into.
How I Determine Rent
When I know the area, I use that knowledge first. I still check Zillow as a sanity check on my number and to note areas where the Zillow value may be skewed. Then I’ll check out what competitors are asking to ensure I haven’t missed a market change. If I have to go outside of my area of expertise, I determine rent using the methods above.