Omar Bennett
Determining the fair market value for housing rentals is essential for a successful rental business. Setting the right rent price can be the difference between vacancies and attracting good tenants. Fair market value is influenced by several factors, including the property's size, type, location, and local real estate market. Landlords can use online tools and comparable sales methods to estimate a fair rental value, ensuring they charge enough to maintain a positive cash flow while remaining competitive in the market. Understanding and calculating fair market rent is crucial for landlords to make informed decisions and maximize their investment potential.
| Characteristics | Values |
|---|---|
| Comparable properties | The best indicator of fair market value is what other landlords are charging for similar properties in the same area. |
| Desirable features | Properties with more desirable features, such as modern appliances, central air conditioning, a balcony, or a garden, can generally command higher rents. |
| Property type | The property's type, size, and location also influence its fair market value. For example, a single-family home typically has a higher fair market rent than an apartment complex, while duplexes and townhomes fall in between. |
| Local real estate market | Fair market value is influenced by the local real estate market, including supply and demand. |
| Rental value of furnishings | The rental value of furnishings can be added to the overall fair market value of the property. |
| Amenities and square footage | Fair market value can be higher for units with additional amenities and more square footage. |
| Number of bedrooms and bathrooms | The number of bedrooms and bathrooms in a unit can impact its fair market value. |
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What You'll Learn
Comparable sales method
The comparable sales method is one of the two methods allowed by the courts to determine the fair rental value of a property. This technique requires the determination of two amounts: the fair market value of the subject property and the rate of return on investment that an unrelated lessor of comparable property would require.
The fair market value of a property is the price an asset would sell for on the open market when certain conditions are met. These conditions are: the parties involved are aware of all the facts, are acting in their own interest, are free of any pressure to buy or sell, and have ample time to make the decision. The fair market value should be readily available from real estate sales records.
The rate of return, or the required rate of return, is more subjective. The Tax Court used 13% in the 1999 Hunt & Sons (66 TCM 853) case, but a higher rate of return may be justified. A required rate of 15% would probably not be unreasonable.
Once these two values have been determined, they are multiplied to get the fair rental value. For example, if your home is worth $250,000 and your local capitalization rate is 12%, the fair market rental value is $30,000.
It is important to note that rental costs vary considerably from area to area, and Fair Market Rents (FMRs) are used to determine the maximum rent that a landlord will be allowed to charge. FMRs are statistics developed by HUD and are calculated using gross rents data from the U.S. Census Bureau, gross rent information from HUD’s American Housing Survey, and additional rental rate data from yearly telephone surveys.
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Rental value of furnishings
The rental value of furnishings is a critical component of determining the fair rental value of a property, especially when claiming housing allowances or tax exclusions. While there is no single formula for calculating the fair rental value of a furnished property, several methods and considerations can help guide the process.
Firstly, it is important to note that the Internal Revenue Service (IRS) considers the rental value of a furnished home as a whole, rather than the sum of the rental value of the house and the rental value of the furnishings. This means that simply adding a separate fee for rental furniture is not the correct approach. Instead, the focus should be on determining the fair rental value of the property as a furnished unit.
One method to determine the rental value of furnishings is to consult a local or national furniture rental company to understand the cost to rent similar furniture for the property. This can provide a good indication of the additional value that the furnishings bring to the overall rental price. Another approach is to use the percentage method, where the average cost of purchasing the furnishings is calculated, and then 20% of that cost is used as the rental value.
Additionally, it is essential to consider local market comparisons. Housing costs vary significantly between different areas, so calculating the rental value of furnishings should be based on the specific real estate market. Obtaining rental comparisons for similar furnished properties in the same community can help establish a fair rental value for the furnishings within a home. Consulting a licensed realtor or a real estate agent familiar with the local market can provide valuable insights into determining the rental value of furnishings.
Fair rental value is also influenced by other factors, such as square footage, utilities, garages, and other appurtenances. These factors collectively contribute to the overall fair rental value of a furnished property. It is important to document the basis for determining the rental value of furnishings and the fair rental value of the property as a whole, as this information may be required during audits or when claiming housing allowances.
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Fair Market Rents (FMRs)
FMRs are calculated using several different data sets, including gross rents data from the US Census Bureau, gross rent information from HUD's American Housing Survey, and additional rental rate data from yearly telephone surveys. HUD issues annual FMRs for approximately 2,500 different areas in the United States. The FMRs take into account factors such as unit size and the number of bedrooms, with larger units generally having higher FMRs. For example, the FMR for a one-bedroom apartment in a specific area may be $1,600, while the FMR for a two-bedroom apartment in the same area may be $2,000.
FMRs are also used to set payment standards for housing vouchers. The Public Housing Authority (PHA) determines a payment standard that is between 90% and 110% of the FMRs. If the unit rent is greater than the payment standard, the tenant is required to pay the additional amount. In cases where the household does not have documentation of the actual rent paid, the Department of the Treasury's Emergency Rental Assistance Program allows grantees to make payments to households up to the maximum of the applicable FMR or Small Area Fair Market Rent (SAFMR). SAFMRs are calculated for ZIP Codes within metropolitan areas.
It's important to note that FMRs are not a rigid determination of rental rates. Landlords have some flexibility to charge more or less based on factors such as the number of bedrooms, bathrooms, overall square footage, and amenities. The exact rental rate will typically need to be approved by the local PHA administering the Section 8 program. Additionally, FMRs are only used as a guide for setting maximum rents, and landlords can choose to charge less if they feel it aligns with their investment strategy.
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Location, size, and type of property
When determining fair market value for housing rentals, location, size, and type of property are key factors to consider.
Location
The location of a property is a significant determinant of its fair market value. Properties in desirable neighbourhoods with good schools, public transportation, and shopping and entertainment options tend to have higher fair market values. Additionally, properties in metropolitan areas generally have higher fair market rents than those in non-metropolitan counties. The US Department of Housing and Urban Development (HUD) calculates Fair Market Rents (FMRs) for approximately 2,500 different areas in the United States, taking into account factors such as unit size and the number of bedrooms.
Size
The size of a property directly influences its fair market value. Larger properties with more square footage typically command higher rental rates. For instance, a larger three-bedroom apartment may have a higher fair market value than a smaller one-bedroom unit in the same building or neighbourhood.
Type of Property
The type of property also plays a role in determining fair market value. Unique properties, such as those with historical significance or custom features, may have higher fair market values due to their rarity and specialised construction. Conversely, properties with functional obsolescence, where the layout or design is less desirable or outdated, may have lower fair market values.
It's important to note that fair market value is not solely based on the property itself but also on comparable properties in the area. By analysing recent sales data of similar homes in the same neighbourhood, appraisers can determine the fair market value of a specific property.
Additionally, furnishings, utilities, and additional features such as a garage or pool can further influence the fair market value of a rental property.
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Current rent rate for comparable properties
The current rent rate for comparable properties is a crucial factor in determining fair market value for housing rentals. This involves researching and comparing the rental rates of similar properties in the same area. Several online tools, such as Rentometer, Zillow, and RentCast, offer instant rent estimates and comprehensive reports on rental rates for comparable properties. These platforms allow users to view rental rates for nearby properties, along with features, location, and market trends.
When determining the current rent rate for comparable properties, it is essential to consider various factors. These factors include the physical attributes and amenities of the property, such as square footage, the number of bedrooms and bathrooms, and the presence of additional features like a balcony, garden, or central air conditioning. By comparing properties with similar characteristics, individuals can gain a better understanding of the fair market value for their specific property.
Additionally, local market conditions play a significant role in determining fair market value. Rental rates can vary considerably from area to area, and it is important to analyze the specific market trends and dynamics of the location in question. This includes considering factors such as local rent control laws, property taxes, insurance premiums, and homeowners association fees, which can influence the overall rental rate.
To obtain accurate and up-to-date information on comparable properties, it is recommended to consult local realtors or individuals in the residential rental business. They can provide written quotes and insights into the current fair rental value in a specific neighborhood. It is also advisable to collect and retain comparable rental listings from various sources, such as newspapers, Craigslist, or other independent reference sources, to support the determination of fair market value.
By utilizing online tools, comparing similar properties, considering local market factors, and seeking expert advice, individuals can effectively determine the current rent rate for comparable properties. This information is essential in setting a fair and competitive rental value for their housing property.
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Frequently asked questions
Fair market value for housing rentals is the monthly amount of rent a property type is likely to receive in a particular area. It is determined by how much renters are able and willing to pay in your area, and the best indicator is what other landlords are charging their tenants for similar properties.
Fair market value is determined by multiple factors. The best way to calculate how much rent to charge is to look at the current rent rate for comparable properties in the neighborhood. You can find these "comps" on websites such as Zillow, Craigslist, Apartments.com, or Rentometer.
Understanding fair market value is essential to a successful rental business. Setting the right rent price can mean the difference between vacancies and attracting good tenants. Determining the fair market value for your property helps reduce the risk of vacancy and can also increase the number of applicants vying to rent your property.
Fair market value is influenced by the property's size, type, and location, and features. For example, properties that are in better condition, with modern features and appliances, generally obtain a higher fair market rental value. It is also influenced by local real estate market conditions and comparable sales.
There is no standard calculator for determining fair market value, as it needs to be calculated for every property individually. However, you can use online tools to estimate market rents and calculate your cash flow. These tools include Rentometer, Zillow, and Craigslist, which allow you to input factors such as location, square footage, and the number of bedrooms and bathrooms.
