By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
by Johns Prins, Originations Analyst
One of the most important components of managing a residential rental income property is determining the fair market rental value. Once you determine this calculation, it will help you determine the rent you plan to charge your tenants. These rental incomes will become annual cash flows that will become the fundamental basis for the property’s overall value—so needless to say—the figures you decide on are of tremendous importance.
In this article we’ll cover the following topics:
- Explanation of Market Rent
- How to Search Rates to Find Fair Market Rent Value
- Ways to Find Fair Rental Market Value Calculation
- Why You Should Start Your Fair Market Rental Value Calculation Now
How does one derive appropriate rental figures which are reasonable while offering the property the opportunity for the highest short-term cash flows as well as value perception in the present and future? The fair market rental value of the property is a number that rental property investors highly seek.
You Must Understand Market Rent
Perhaps it would be valuable to revisit what market rent is. Market rate, in this sense, refers to the rate in which people are willing to pay, the “going rate”—if you will—in a specific market. In a (relatively) free market setting, rental rates—whether it be apartments, homes, what have you—will be dictated by the market and what it can absorb—a market’s carrying capacity.
There’s certainly some ambiguity surrounding these figures, and some factors that may exceed the control of rental income property owners or managers—but with that said, the following components will both help relevant constituents associated with these rental properties determine what the market will bear as it pertains to pricing—as well as several other concepts that will be valuable to know and understand with a rental investment.
Search Rates to Find Fair Market Rent Value In Your Market
One of the most efficient ways to calculate fair market rental rates for your property is to look at the rents charged by similar properties within the market. Comparing the similar, local properties to your own regarding physical home size, bedrooms, and bathrooms, furnished or non-furnished options—among many other price-influencers, will allow you to build a foundation for the kind of rental rates you seek based on your perceived placement in the marketplace.
It is also important to investigate residential vacancy rates in your market before searching comparable rates. Published on a quarterly basis, vacancy rates offer constituents an illustrative idea of the proportional occupancy in a particular market or submarket.
vacancy rates offer an illustrative idea of the proportional occupancy in a specific market
Vacancy rates will assist you and help you better understand and thus respond to comparable rent information you gather throughout your search. It’s also valuable to evaluate the historical data available as well as future forecasts—which will both undoubtedly assist you in setting rental prices.
Widespread reports of this nature include those produced by CoStar, Colliers International, and REIS. These reports can be accessed online or in print, individually or by subscription (in some cases at a marginal cost).
3 Ways to Find Fair Rental Market Value Calculation
Here is a list of the top 3 ways to find and research the fair market value calculation of the rental property you may invest in.
1. Automated Web-Based Tools
(Zillow.com, Trulia.com, RentBits.com)
Popular rental websites like Zillow, Trulia, RentBits, and others will provide real asking rents of local properties. Information ranging from physical size to availability to pets to historical rental data at the property—as well as typically a breadth of photographs can all be gathered from these useful resources, and thus applied in your own rental rate derivation.
Other than reports generated by RentRange.com, these platforms provide an automatic market rent determination for landlords—and is available at any time, on a moment’s notice—and can be accessed free of charge.
2. Traditional Media Outlets
(Local newspapers, local advertisements, word of mouth, Craigslist)
Don’t let the breadth of options available on the web prevent you from exploring some of the other price-comparison options that are readily available to landlords. Other, more traditional rental ads are commonly displayed in newspapers and other forms of media—which account for potentially more current and up-to-date listings as well as explore a group of landlords or other constituents who are unfamiliar with or otherwise choose to forego using the web to advertise their products.
In any case, following up with these traditional media outlets will typically involve a phone call to discuss rental rates and availability. Although given the circumstances, you likely won’t find yourself renting a home or unit from the individual—not only will you get an idea of pricing, but you will have an opportunity to speak with a peer who will only contribute to your network and offer you a contact for potential questions or ideas in the future.
3. Professional Networks
(Local Landlord Associations, Renter Associations, real estate clubs)
If you’re new to the realm of real estate—or more specifically—new to residential rental property ownership or management (or in many cases—both), it is important that you recognize the broad range of professional networking resources that are readily available to you. Local, or regional landlord and renter’s associations, real estate clubs—some residentially focused—exist and are eager for new members.
These professional organizations offer an opportunity for networking with local peers—but perhaps just as importantly, they provide access to local industry leaders as well as databases of market data and other rental pricing information. This information along with the other resources mentioned can significantly assist in not only setting rental rates—but adjusting them over time—and could even perhaps lead to expanding your residential rental portfolio altogether.
Start Your Fair Market Rental Value Calculation Now
So whether you find yourself on the outside looking in on the residential rental property business—, or you’ve already built an impressive portfolio of homes, be sure to remain cognizant of the broad array of options available to you.
Whether it be the novel, automated web-based platforms, more traditional and personalized media forms, or professional networks—these resources are there to help offer an idea of rental prices and provide a breadth of other relevant information. They may also help you build a network in the local community that will be invaluable for future questions, uncertainty, or assistance.
The bottom line is— nearly all of these resources come at absolutely no expense at all—so if this information is all readily available, and free—what’s stopping you from doing the research?
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how Corevest can help grow your rental and rehab business, please call Johns Prins at 212.230.3341 or email firstname.lastname@example.org.