How to determine fair market rental for a property by value of home

Written by cinda roth
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How to determine fair market rental for a property by value of home
Consider the property's condition when assessing rents. (house image by hans slegers from Fotolia.com)

Determining the rental price for a property affects how long the property will be vacant, what the turnover rate will be, and ultimately how much profit you make. One of the quickest ways to estimate the fair market rent for a property is to calculate and apply an average gross rent multiplier to your property value. The GRM compares the ratio of rental income to property value for comparable properties.

Skill level:
Moderately Easy

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Instructions

  1. 1

    Call your local realtor, go to a free online multiple listing service (MLS), or go to online posting boards such as Craiglist and search for current investment properties for sale within a quarter mile radius of your property. MLS only lists homes for sale. Record the address and annual rent.

  2. 2

    Use an online property value estimator such as zillow.com or ask your personal realtor for the estimated property value of each of the rental properties you identified.

  3. 3

    Divide the market value by the annual gross income to get the gross rent multiplier for each property identified.

  4. 4

    Average the gross rent multipliers. Divide your property value by the gross rent multiplier to obtain the estimated fair market rental price for your property in average condition, such as cleaned with negligible stains in the carpet and on the walls.

  5. 5

    Average the lower 50 per cent of gross rent multiplier values and divide your property value by the averaged gross rental multiplier to obtain the estimated fair market rental price for your property in good condition, such as newly painted with stain-free carpet.

  6. 6

    Average the upper 50 per cent of the gross rent multiplier values and divide your property value by the average gross rental multiplier to obtain the estimated fair market rental price for your property in poor condition, such as some small tears in the carpet or significant stains in the carpet.

Tips and warnings

  • Add the cost of any atypical service provided, such as landlord provided utilities or gardening, to the estimate, as the GRM does not account for these.
  • Talk to a realtor about the added rental value if your property includes an atypical feature such as a pool house. This will likely increase the fair market value above what would be estimated by the GRM.
  • GRM estimates fair market value for typical properties in the area. Adjustments should be made through consultation with a realtor or other adviser if your property is atypical such as it is a corner lot with an over sized yard for the area or is the only home in the area with a pool.

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