Best way to determine fair market rent - Posted by Dave , IL

Posted by JPiper on August 31, 2000 at 08:33:16:


Never heard of this rule…but, just so that you know, this “rule” would not even come close in my area. Let’s see, $80K house renting for $512?? Try more like $800.

And therein is the problem with “rules”. I’d throw that one away if I were you. Let the market dictate your rent.


Best way to determine fair market rent - Posted by Dave , IL

Posted by Dave , IL on August 30, 2000 at 21:27:53:

Hi all,

Just would like to know a quick and easy way to determine fair market rent for sfh and mfh. Thank you

A formula - Posted by Bill Gatten

Posted by Bill Gatten on August 31, 2000 at 19:31:57:

Dave here is how I do it. 'Just did it this morning, on a property I just picked up, as a matter-of-fact.

This is a rule of thumb that varies upward or downward depending upon rental property availability and desirability (i.e., recreational areas, seasonal area, etc. would be excluded from this method).

The following formula probably may need to be calibrated for your area: if so, consider calling 5-10 rental property ads (in your rental range) and explain that you are a new investor with a rental property, and that you?d like to ask them how they figured out the rent to charge. Then, somewhere in the conversation find out about how much the property is worth relative to the rent they?re asking. 5 or 10 should be enough to average-out in order to see if the formula works. You might need to adjust it by a 10th of a percent or so.

In most geographical areas, on a $50K property you could charge between 1.0% to 1.4% of the property’s value; for a 100K property the safe range would likely be between 0.9 and 1.1% of the property’s value; on a 200K property about O.75 to 0.9% percent; on 300K property o.6 to 0.75%; a million dollar property about .03% to .04%.

The reason this almost always works out every where we go, is because Fair Market Rent is, to quite a large degree, a reciprocal function of the median income tax range in a given geographical area. That is to say that when incomes in an area are higher, a typical property owner needs to collect less rent, percentage-wise, in order to break-even relative to his tax benefits, than would a low income landlord (lower tax bracket area). Therefore, in lower income areas, rents are proportionately higher as a percentage of FMV, because the tax write-off benefit is so much less for the owner. And one learns early in the game that if he tries to charge more than the next guys does for a similar property, his vacancy rate goes up and eats up his profit: if he charges too little, he has no vacancies, but his profit suffers. So the idea is to hit it juuussstttt right if you can.

Bill Gatten

P.S. BTW, when you’re calling these folks, you might ask if any have given any thought to selling.

Re: Best way to determine fair market rent - Posted by James

Posted by James on August 31, 2000 at 18:01:16:

Try checking the area comps or use the appraised value if you have one to work with. Then look up what a 30 year loan would be for the full amount. Always use the average intrest rate for a home loan. In this case go with 8.5%. Then follow you finger across the page to the monthly payment and use that amount.

If your doing a lease option you can even in some areas of the country tack on a $200, $300 and sometimes even $400 a month for rent credit or as we call it in our contracts additional option consideration.

Good Luck.

Re: Best way to determine fair market rent - Posted by Mark (SDCA)

Posted by Mark (SDCA) on August 31, 2000 at 10:49:10:

See if you can find a rental agency. All they DO is find rentals for people. It’s their job to know what FMR is. Then verify that against the newspaper…


Re: Best way to determine fair market rent - Posted by David MacGown

Posted by David MacGown on August 31, 2000 at 05:45:54:

Hi Dave,
One useful way of determining the rent for a house is to divide its market value by 156. This is known as the rule of 156. The rule implies that landlords can expect a 156 month (or 13-year) payback on houses they rent.

This rule was devaloped before the tax laws changed in '96 so you may want to verify this with someone knowledgeable on the subject.

I hope this helps.


Re: Best way to determine fair market rent - Posted by Laure

Posted by Laure on August 31, 2000 at 01:27:54:

Look in the newspapers ! Rents in Illinois have been rising steeply in the last 2 years. Realtors don’t have a clue unless they specialize in property management, and most DON’T.

Laure :slight_smile:

Re: Best way to determine fair market rent - Posted by JoeKaiser

Posted by JoeKaiser on August 31, 2000 at 24:35:49:

Stick a “for sale” sign on it. Once someone agrees to buy . . . there’s your market value.


Re: Best way to determine fair market rent - Posted by Jim IL

Posted by Jim IL on August 30, 2000 at 23:49:12:

I would call a few RE agents in the area and tell them what you are seeking. Some may not be cooperative, but someone surely will help.
You may also want to look at some classified ads for rentals in the area and compare that.
Also, talk to some other investors in the area, either through an REI club or just call a few up.
Where in Illinois are you?
I may be able to help a bit here if you are near me.
Jim IL