Everything you need to know about fair market rent for beginner real estate investors.
What is fair market rent?
It is how much you can charge for renting out a home or unit based on a few factors we will discuss here.
You need to know the fair market rent because it tells you how much you can make per month from a property when renting it.
How do you calculate fair market rent?
There are 3 main factors and 5 minor ones.
The first factor is the number of bedrooms. Typically, if a home has more bedrooms, it will increase the rent and if it has fewer bedrooms the overall rent will decrease.
The second factor is the number of bathrooms. Typically if a home has more bathrooms it will increase the rent because it allows for more privacy when taking your shits and jerking off in the shower. If there are fewer bathrooms that means less privacy and less rent.
The third major factor is the size. The bigger the property, typically more you can charge for it. And vice versa. This number is measured in square footage. We are going to use these three factors in our calculations later!
Factor number 4: the location. This means, what city is it in and what area of the city, all the way down to the nearest block. Sometimes a few blocks can make a rental be worth so much more. For example, having a rental right outside a train station might be worth more than a rental 5 blocks away from the train. Closer to points of interest like tourist attractions, transportation, jobs all typically increases the rents.
Factor 5: Condition. If you are renting out a brand new place then you can charge more for the place than you can for something that looks and is old.
Factor 6: The type of house. If you rent out a whole home, it might be able to rent out more than renting out an apartment in an entire building because its a shared space.
Factor 7: Amenities. The more things the property has to offer like a garage, or lawn space, a backyard, a pool, extra storage space can increase the rents vs a place that does not have those things.
Factor 8: This one is only in select locations, but rents can increase depending on the timing of the year. For example in New Jersey, the rental properties in the Jersey shore charge a lot more when its beach season, but when its the winter, its a ghost town and the rents drop.
I had NO IDEA how to figure out this number at first. So I straight up took a guess. I used to live in the area I was gonna rent and I remember I paid 475 for my room, so I just multiplied 475 by how many bedrooms I had. Yeah.. that screwed up all my calculations and was a bad idea.
So I went to the bigger pockets book to figure out what I had to do and I re-read the section on calculating income. It says to do any of the following 8 things: constantly look at you local papers for rental listings, look at craigslist, check out what other people are charging, read other for rent signs, talk with other landlords to see what they charge, try raising the rent in your unit, raise the rents if you have too many applicants, and check the MLS. Half of this stuff was useless because, I didn't have any units!
So I thought to myself...“Well that’s great, a bunch of general ass advice that sounds like a lot of work, guess I should quit right now then.”
It helped give you a general idea what rents were but to know exactly what I can charge was important me.
I knew I was going to figure this out using real numbers and data. So I called my real estate agent. He sent me a list of properties in Ewing, NJ the town I am invested in and how much they were renting for.
I took that information and used the three most important factors: bedrooms, bathrooms and square footage did some math magic and had created a formula that could predict what the rent was based on bedrooms, bathrooms, and square footage of a property.
But getting that information and then putting it in a spreadsheet and doing the math was a pain in the ass. So then I created a tool that does it for you.. For free.
You enter the city, state, zip code, number of bedrooms, number of bathrooms and the square footage of the place you are analyzing. After it a few minutes it will get a set of rentals in the area and use that predict what the rent could be in the property you are looking to invest in.
This took me months to complete and it isn’t perfect for every city, some cities don’t have many rentals.
You can just use it right here: