What is fair market rent and how is it calculated?

Published by
Marc Rutzen
December 1, 2023
What is fair market rent and how is it calculated?

What is Fair Market Rent?

Fair Market Rent (FMR) is a term used in the United States to describe the amount of money that a property would rent for on the open market. It's often used in the context of various housing and rental programs, including those overseen by the Department of Housing and Urban Development (HUD). The key aspects of FMR are:

  • FMR Forms the Basis for Housing Subsidy Programs - FMRs are used to determine payment standard amounts for the Housing Choice Voucher program, to establish a limit on the amount of rent a landlord may charge for a unit, and to determine eligibility for HUD's family subsidy programs.
  • Fair Market Rents Are Re-Calculated Annually - HUD calculates FMRs for each metropolitan area and non-metropolitan county throughout the United States. The calculation is based on the rents paid in each area for various types of housing.
  • Local Market Conditions Should be Reflected in FMR - FMRs are intended to reflect the current market conditions and are set so that approximately 40% of standard quality rental housing is available to voucher holders. This makes sure that individuals using vouchers have a fair choice of rental housing.
  • FMRs Vary by Location and Unit Size - FMR varies depending on the location and the size of the rental unit. For example, FMR for a two-bedroom apartment in a metropolitan area is likely to be different from that of a rural area.
  • They Should Provide Guidance for Renters and Landlords - FMRs provide guidance to both renters and landlords about reasonable rent levels for various types of properties in different geographic areas.
  • FMRs are Influenced by Local Housing Markets - Factors such as the local supply and demand for housing, the quality of available housing, and the types of available housing units influence the determination of FMR.

FMRs play an important role in ensuring fair rent standards and in helping low-income families find adequate housing at a reasonable cost.

Why is it important for landlords to know their local fair market rent?

Knowing the local Fair Market Rent (FMR) is important for landlords for several reasons:

  • Setting Competitive Rent Prices - Understanding FMR helps landlords set rent prices that are competitive within their local market. This knowledge ensures that they price their properties appropriately - neither significantly underpricing and losing potential income nor overpricing and struggling to find tenants.
  • Compliance with Housing Assistance Programs - For landlords participating in housing assistance programs, such as Section 8, knowing how FMR is calculated is important. These programs often base their rental assistance payments on the local FMR. Landlords need to ensure their rent requests align with these standards to participate in these programs.
  • Attracting Qualified Tenants - Knowledge of FMR can help landlords attract tenants who are using housing vouchers. Many tenants rely on these metrics to find affordable housing options. By setting rents at or near the FMR, landlords can appeal to a broader tenant base.
  • Market Analysis and Investment Decisions - FMR data can assist landlords in performing market analysis, which helps make informed investment decisions. This includes purchasing new properties, renovating existing ones, or determining the best geographical areas for investment.
  • Understanding Market Trends - Regularly monitoring FMR helps landlords stay informed about market trends, including shifts in rental demand, changes in tenant preferences, and other economic factors that can affect the rental market.

  • Financial Planning and Forecasting - By understanding the FMR, landlords can more accurately forecast their rental income and plan for expenses, renovations, and future investments. This helps in maintaining a stable and profitable rental business.
  • Legal Compliance and Fair Housing Practices - In some jurisdictions, there may be legal limits on how much rent can be charged for certain types of properties. Understanding FMR helps landlords remain compliant with these regulations and engage in fair housing practices.
  • Adjusting to Economic Changes - Economic factors like as inflation, changes in employment rates, and shifts in the real estate market can influence FMR. Landlords who are aware of these changes can adjust their rental strategies accordingly.

Knowing the local FMR enables landlords to set appropriate rents, comply with housing program requirements, make informed investment decisions, and adapt to changing market conditions, all of which are help in the successful management and profitability of rental properties.

Which factors influence fair market rent?

We go more in-depth on each of these factors in our post on how to How to Find Rental Comps and Set Market Rents for Real Estate Investments, but here's a quick overview of some of the factors that influence Fair Market Rent (FMR):

  • Property Location - The specific location of a property within a city or region can greatly affect its FMR. Properties in desirable areas, such as those near good schools, public transportation, and amenities, often command higher rents.
  • Local Housing Market Conditions - The supply and demand dynamics of the local housing market significantly impact FMR. In areas with high demand for rental properties and limited supply, FMR tends to be higher. Conversely, in areas with an oversupply of rental units, FMR may be lower.
  • Economic Factors - The overall economic conditions of a region, including employment rates, income levels, and economic growth, can influence FMR. Higher income levels and robust economic growth usually lead to higher FMRs, as people can afford to pay more for housing.
  • Property Type and Size - Different types of properties (e.g., apartments, single-family homes) and sizes (e.g., number of bedrooms and bathrooms) have varying FMRs. Larger and more luxurious properties typically have higher FMRs.
  • Housing Quality and Amenities - The condition of the property, including its age, maintenance level, and amenities (like a pool, gym, modern appliances), also play a role in determining FMR. Well-maintained and amenity-rich properties can justify higher rents. Our QualityScore algorithm was specifically built to extract quality, condition and amenities from real estate photos to help investors assess these attributes objectively across deals.

  • Local Regulations and Rent Control - In some areas, local government regulations or rent control measures can influence FMR. These regulations might set caps on how much landlords can charge for rent, affecting the FMR in these locales.
  • Historical Rent Trends - Past rent trends in an area can also impact FMR. If an area has historically had rising rent prices, this trend can continue to influence current FMR calculations. This is something we specifically address in HelloData with our daily historical rent trends feature.
  • Cost of Living - The general cost of living in an area, which includes prices for goods, services, transportation, and utilities, can affect FMR. Higher cost of living usually correlates with higher FMR.
  • Inflation and Economic Policy - Broader economic factors like inflation rates and fiscal policies can indirectly influence FMR by affecting the overall economy and, consequently, the real estate market.
  • Demographic Trends - Changes in demographics, such as an influx of young professionals or families, can also impact FMR, as different demographic groups have varying housing needs and preferences.

Understanding these factors can help landlords, tenants, and policymakers make informed decisions about rental housing. FMR is a dynamic metric, reflecting the ever-changing conditions of the housing market and broader economic landscape.

Property managers, investors, brokers and appraisers all use HelloData to analyze multifamily comps, optimize rents, and increase deal flow.

Marc Rutzen

Marc worked in real estate for 5 years before launching multifamily analytics startup Enodo, which he sold to Walker & Dunlop (NYSE: WD) in 2019. At W&D, he served as Chief Product Officer, developing products that helped source billions in loan volume. Outside of work, he enjoys reading, running, and spending time with family.

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