How Do We Calculate Fair Market Value for Rentals?
It's Not Magic, but It's More Than Math
Determining the fair market value (FMV) of a rental property is crucial to getting it rented quickly and to a quality tenant. Calculating an accurate fair market rent ensures that rental rates are competitive, attracting the right tenants while maximizing returns for our clients. When performing a rental analysis for our clients or agents, we consider a wide range of factors, but the most important are listed below:
Identify Comparable Units:
The first thing we search for is comparable units. The best matches for calculating FMV are exact model matches in terms of bedrooms, bathrooms, and layout in the same community. However, these kinds of comparable properties cannot always be found. In this case, the search will be expanded to find similar properties, even if they aren't perfect matches. We will then, of course, take any differences into consideration when evaluating our unit.
Analyze Rental Rates:
The next thing we consider is the appropriate rental rate established by the comparable properties we previously identified. However, we do not compare to properties that are currently on the market as “active” listings. We are primarily focused on comparable properties that have recently rented, and factor in how long they were on the market. Although an aggressive rental rate may sound initially more attractive to property owners, any increased income from pushing the rental rate may be cancelled out by lost revenue waiting for a tenant. Overpriced properties tend to stay on the market an average of 45 days longer than their fairly priced counterparts, and time is money!
Consider Seasonal Variations:
After finding a good baseline rental rate for the property, we factor in seasonal variations, as the time of year will affect how aggressive we can be with rental rates. During slower periods, such as the winter and holiday seasons, rental rates are depressed, but during the summer rental rates can be pushed as demand is higher. Knowing when a property will be listed is just as important as any other factors in determining the FMW. Additionally, when rental inventory is high, FMV may be lower due to the additional competition in the market. In contrast, when rental inventory is low, FMV may be higher.
Factor in Unique Features:
Lastly, we consider any distinguishing characteristics of the property in question. This includes any cosmetic or structural upgrades that will not only make it stand out, but potentially garner a higher rental rate. This includes features such as custom flooring and paint, top-of-the-line appliances, pools/spas, solar power, and more. All of these can result in a higher rental rate, and less time on the market.
The rental market is constantly changing, and as we are in it every day, we may be able to provide the most accurate FMV to get properties rented quickly and with high-quality tenants.
