Fair Market Rent Evaluation

I had a recent question:  “Aside from watching asking prices for rents on places like Craig’s list is there a good way to determine the fair market value in a given city or area for a property?” Determining Fair Market Rent can difficult to figure out at times.  Here is a process that can help with the fair market rent evaluation.

First off, I encourage every new investor to pick an area or neighborhood and buy your initial cluster of properties there. This will help you become intimately familiar with the area including: problem buildings, rent amounts, neighborhood snoops (these are the little old ladies that know everything about everyone’s business), and possible other real estate opportunities.

If you are looking at a new area to expand/buy into, I recommend the following tactics to further confirm fair market value rents:

1. Drive around the area and call on every red and white “For Rent” sign you see. I understand this is simply the asking price for rent, but if you call on 10-20 of them, you should get a pretty good median rent amount to use for each bedroom count.
2. If there are larger apartment complexes (greater than 10 units) in the area, call and book an appointment to see their units. Depending upon the age and condition of the apartments (compared to what you are looking at), these larger buildings will either be competition (they are the same age and condition as yours) or they are the upper price point for rentals in your area (they are newer in age and better condition).
3. I have a couple of investor friends that use Section 8 rental amounts as their method to analyze rents. I am not convinced this is a great tool to find rental amounts as Section 8 pays the same rent in South Minneapolis as in North Minneapolis. The market rents in South Minneapolis tend to be 10-20% higher as the properties tend to be different from in North Minneapolis.
4. Network with other investors that own property in the area. Most are willing to give out this information to a fellow investor. Depending upon what area you are interested in, I may own property there or know someone who does. Drop me a line and I would be happy to give you my opinion.
5. If you are working with a Minnesota Realtor, he can use the MLS to research the rent amounts listed on the rental properties for sale in that area. Again, you should review 10-20 rentals and use the median amount as often the MLS data can be wrong.
6. Once you find a property that you are interested in, prior to submitting a purchase agreement, you should ask for copies of the signed leases from the seller. Not only will this confirm the rent amount, it will give you other valuable information including lease expirations, lease terms, and the amount of the damage deposits.
7. One more data point that can be helpful is stopping by the local coffee shop or any place that has a bulletin board that people can post items on. Look for “For Rent” ads.
8. In Minnesota, there are several free newspapers that have cheap classified advertising and often people will use those as an alternative place to advertise their rentals.

Using these eight sources in a systematic way should allow you to quickly get a good feel for the fair market value rent in the area. The final rent amount you put on the apartment will vary slightly depending upon condition, street location, location in the building, as well as amenities (washer dryer, hardwood floors, air conditioning, landlord-paid heat).  Even the time of year that you are leasing can change the rent amount slightly.

Lastly, leasing is very similar to selling houses.  If you are not getting any calls on your rental advertising, your price (rent) is too high.  If you are getting showings, but no one is filling out a rental application, the location or condition of the unit may be scaring your prospects away. Keep adjusting your rent until you find the sweet spot that prospective tenants are willing to pay.