- posted: Aug. 03, 2022
What is Fair Market Rent? What to Know Before Renting
When potential tenants are looking for a new place to rent, a metric they’ll likely be keeping in the back of their mind is ‘fair market rent.’ It helps them decide what is and isn’t reasonable to spend on an apartment or house. But what is fair market rent?
In this blog, we’ll take a closer look at what fair market rent really is, why it’s important for landlords, and whether you should use it. Let’s dive right in!
Fair Market Rent Definition
Fair market rent is a statistic describing the expected rental price for a property. The calculation is based on characteristics of the property and its location that have been determined by the United States Department of Housing and Urban Development (HUD), and can serve as a guideline for what you should charge for rent.
This is incredibly important for landlords because if tenants feel like they’re being overcharged, you could run into a number of problems, namely extended vacancies.
Landlords should review the fair market rental value each year to ensure they’re charging the right amount for their property. This will help make sure the rent is attractive for prospective and current tenants, while also allowing you to receive the appropriate compensation and keep your business running smoothly.
Another calculation that should be taken into account, especially in New York City, is the small area market rent. This is the estimated rent amount for a specific ZIP code within a metropolitan area. This is also used to determine what the payment standards should be for Section 8 housing programs as well as the Exception Payment Standards.
How Is Fair Market Rent Calculated?
The HUD gathers tons of survey data and uses this to assess the distribution of rents paid throughout the country. When calculating the fair market rent, the rent data from the U.S. Census Bureau, surveys, and a number of other factors regarding the property itself are taken into account. The factors regarding the property can include the location, size, amenities, and much more.
Finally, when all that data is compiled, ‘fair market’ is deemed to be the 40th percentile of gross rents for the average unit in fair condition. The calculation excludes buildings that are less than two years old, that are of poor quality, and are subsidized.
Keep in mind that the HUD only calculates the fair market rents for units that have zero to four bedrooms. In the case of a unit with five or more bedrooms, each bedroom will add 15% to the fair market rent.
What Are Fair Market Rents Used For?
The fair market rent is not only used to determine rent prices, but it is also used for various government programs, such as the following:
The Housing Choice Voucher Program
The Housing Choice Voucher Program, also known as Section 8, is a program that assists low income families, the older individuals, and people with disabilities.
This program serves to help provide safe and sanitary housing for low-income or income-strained households. The program provides assistance for finding a single family home, townhouse, or apartment.
The Emergency Solution Grants Program
This program serves to assist those who are going through a crisis. It helps these people regain stability and permanent housing after a financial crisis. These programs use the fair market rents in order to determine the grants that are given to help combat homelessness and support emergency shelters and other related services.
The Home Investment Partnerships Program
This program gives grants to states and localities in order to help fund the costs of building affordable rental units. These grants are typically given to low income families that require housing assistance. In addition, the HOME investment partnerships program also offers low interest loans to developers who are looking to build new housing units.
Should Landlords Use The Fair Market Rent?
Each rental situation is different, so there’s no one-size-fits-all answer here. There are benefits to setting your rent in accordance with the fair market rent, however you may also benefit from using the current market rent instead.
Regardless of the decision you make, what is most important is that your rent is set to be as fair as possible. If your rent is too high, you may face extended vacancies that can quickly lose you a lot of money. However, if it is set too low, you run the risk of losing money in the long run and possibly being unable to keep your business running. For this reason, you want to try to find the right balance wherever possible.
Outerbridge Law Can Help Protect Your Assets
Finding the right rental rate can take a lot of work, but it will keep your business profitable and your tenants satisfied. However, if damage is done to your building, it could delay your ability to rent the unit and negatively impact your business.
Outerbridge Law is a New York City-based law firm focused on landlord tenant issues, with experience representing both tenants and landlords. If your building has been damaged and it’s preventing you from renting, contact Outerbridge Law today to determine if you have a case.