One of the most important factors of a successful rental business is ensuring that you are charging a fair amount for rent.
When deciding how much they should charge for their rental units, landlords and property managers look at something called “Fair Market Rent.”
Federal agencies also use the Fair Market Rent (FMR) amount to determine the fair amount of assistance.
The Fair Market Rent amount is useful to determine the amount to charge for rent, and it’s based on various factors, including the square footage and local housing market.
What You Need to Know About Fair Market Rent
Who Establishes the Fair Market Rent Value?
The Fair Market Rent rate is established by the Department of Housing and Urban Development (HUD).
It’s the standard used by the government to calculate payments for programs like the Housing Choice Voucher Program (often called "Section 8") under 24 CFR Part 888.
HUD is a federal cabinet department that is responsible for determining payment amounts for housing assistance programs.
Fair Market Rent is determined by conducting an annual nationwide survey.
FMR prices are gross rent prices, meaning they include utility costs.
Why is the Fair Market Rent Amount Important?
The FMR amount is important because it serves as a guideline for landlords who are deciding the price to set their monthly rent for their rental properties.
Every year, property managers and landlords review their area's Fair Market Rental rates to ensure they are charging enough for their property.
When landlords work with tenants who use federal housing benefits, they will need to ensure that their prices are not above the fair market value.
Housing Choice Voucher Program (Section 8)
The Housing Choice Voucher Program, also known as Section 8 Housing Voucher Program, assists people who may struggle to pay rent financially.
Individuals who qualify for Section 8 housing are those with very low-income families, the disabled, and the elderly. This program aims to provide qualifying individuals with safe, sanitary, and decent housing.
Section 8 housing can include single-family homes, apartments, and townhomes. Public housing agencies issue funds from HUD to families who qualify. These funds are sent to the landlords to ensure they are used adequately.
On average, public housing assistance funds cover 30% to 40% of the rent payments, but in some cases, all of the rent will be covered.
Fair Market Rent and Payment Standards
The payment standard is the maximum assistance payment available to a family in the voucher program each month before deducting the total tenant payment by the family.
Total Tenant Payment (TTP) is the amount a family receives in housing assistance that is meant to go toward rent and utilities.
Payment Standard = Fair Market Rent - Total Tenant Payment
The Public Housing Authority (PHA) uses the Fair Market Rent as a guideline to determine payment standards.
The PHA has some flexibility and is allowed to establish the standard payment amount in an area at any level between 90% and 110% of the published FMR.
Emergency Solution Grants Program
The Emergency Solution Grants Program is meant to help families and individuals going through a crisis.
Its primary function is to assist people in regaining permanent housing and stability after a financial crisis.
This program uses the HUD Fair Market Rent determination to issue grants given to urban metropolitan cities and states to support emergency shelter, homelessness prevention, and related services.
How is Fair Market Rent Calculated?
Each year, HUD calculates the Fair Market Rent by looking at the distribution of rent paid by people across the entire country.
Previously, HUD was required to receive 200 responses to their local survey, but now they are only required to receive 100 responses.
HUD's survey methodology has been tweaked to reduce bias in the survey results.
They collect data through Random Digit Dialing (RDD) phone surveys and mail questionnaires.
The Do Not Call registry does not restrict the HUD's FMR survey. While not everyone welcomes a call from HUD, it’s necessary to cast a wide net for the survey in order to reduce sampling bias.
Some of the factors HUD takes into account when calculating Fair Market Rent values include:
- Gross rent data from the U.S. Census Bureau
- Gross rent information from surveys
- The location, size, amenities, and any other special features of the rental properties surveyed
The Fair Market Rent Formula
This formula is meant to demonstrate how much it should cost to rent non-luxury, privately owned, decent, safe, and sanitary housing with suitable amenities, and includes utilities, but not phone.
FMR is defined as the 40th percentile of rent paid by people who have moved in the last two years in any given area.
At the 40th percentile, FMR rent prices are slightly below the median for the area. Some FMR areas have been designated as 50th percentile regions as outlined in 24 CFR §982.503(e).
In the 50th percentile regions, the Fair Market Rent is the median. This formula applies to homes with one to four bedrooms.
For housing with more than four bedrooms, you would add 15% to the Fair Market Rent for each additional bedroom.
Find the Fair Market Rent of Your Home Here
Should Landlords Always Use the Fair Market Rent Amount?
Landlords are not required to use the Fair Market Rent amount.
For example, if a landlord's current rental prices are less than the HUD Fair Market Rent for their area, the landlord can already take advantage of HUD programs without lowering the rent.
The landlord can use the Housing Choice Voucher Program to rent the property to a tenant who receives a Section 8 housing voucher.
