A property’s market rent is the property’s estimated rent potential. That is, if the property is available, how much would the property collect, or generate, in terms of rental payments? While market rent is the estimated rental potential, the contract rent is the scheduled rent which is under contract between the landlord and tenant.
The fair market rent is the monthly payment that consumers would be willing to pay for a unit or property with specific amenities and features including the square foot, number of rooms, and location.
Calculating the Fair Market Rent
The fair market rent is the total amount a unit can collect in rental income per month. This total cost includes required utilities-electric, water, and power, however does not include non-essential utilities that tenants are expected to pay themselves include internet and phone. Some landlords will however not cover the cost of power as that figure can drastically change over seasons as demand for power needs change.
The cost of renting varies based on location, amenities, demand, and other factors such as inflation, growth, economic shifts including new factories in town and others. Ultimately the market rent is the fair market income that a unit can be paid per month.
Purpose of Fair Market Rent
The government uses the fair market rent to determine how much assistance to provide a given an individual or family based on their housing needs. The amount of the fair market rent helps the government calculate how much to give out in rental vouchers for recipients of housing assistance programs. The section 8 government housing program is one such program that relies on the fair market rent amount in determining payment eligibility for housing assistance.
HUD is the agency tasked with determining the fair market rent. They do this by using data from the census and by looking at average rent rolls in nearly 3,000 rental markets.
Section 8 housing program helps tenants without the financial means the ability to rent property that they otherwise could not afford. Eligibility is based on income, amount of household members, and the ratio of debt to income. In order for a property to qualify for section 8 housing, the government will inspect the property and upon passage of the inspection, the government will pay the property owner directly on behalf of the tenant. The size of the property a given household can qualify for is based on how the amount of dependents and size of the family.
The fair marker rent amount helps the government determine how much a tenant can qualify for. In many instances, the tenant will not qualify for the full amount of the rental payments if their income is above the cutoff threshold. The difference between the voucher and the rental amount must be covered by the tenant themselves.
How Fair Market Rent is Determined
The amount a landlord can charge for a rental property is dependent on various factors. The following section will highlight the most important factors that determine the rental price of a unit.
Location of the Property: The value of real estate is primarily dependent on the location in which the property is located. There is no single factor that is more important when determining property value. The average cost per square foot of a given location is used by multiplying this figure with the square footage of the property. The better the location, the higher the rental income a landlord can make. Although size and amenities greatly affect property value, location is more important because the location of an area ultimately determines its demand.
Demand: Demand is partially based on the location of the property because every given geographical location has a certain amount of demand. The more available units in a given area, the cheaper the rent is and conversely the lower the availability of units, and rental rates increase.
Size: While location is the primary unit of property value measurement, size is a not so distant factor. As described above, the average cost per square foot is the basis of how much a unit will cost to rent, however its size is required to multiply the amount of square footage against the cost per square foot. The number of bedrooms and square footage are the primary size factors that determine market rent.
Amenities: The amenities of a unit help the landlord calculate its fair market rent. The better the features of the property are, the higher the landlord can charge. For example, a property with a great view and new kitchen may be more expensive than a larger property that is older in a comparable location.
Quality of Property: The quality of a unit and how new it is greatly affects the landlord’s ability to determine how much to rent a unit for. This depends on its current condition, need for upgrades, and the cost to maintain.