How To Determine Fair Market Rent On An Investment Property

Determining what a property is going to bring in every month is very important to figure out when you're running the numbers on a potential investment property. I want to give you a couple of tools and guidelines to use, so that you can try to make the numbers as close and accurate as possible.

Check In With Your Team
When researching what other units in the area are renting for, first I would go to my real estate agent and I would ask them.

Your real estate agent should know what places are renting for and have a pretty good idea of how quickly they can get rented and what is the maximum amount of rent you can get for a unit, depending on the condition that it's in.

So, first I would talk to my real estate agent and if I wasn't using a real estate agent, then no worries, there are other ways that you can go and do the research yourself.

Research Online
Some of the places that you can go and do research online, are places and websites like MLS, Zillow, or Rentometer. I would go to one of these sites, look at the rentals, check out places that are in similar size to you, similar area, look at the pictures, see what kind of condition they're in, what kind of location exactly that they're in. Some other websites where you can do the same thing are; Kijiji (Canada), Craigslist,  or Viewit.ca if you're in Canada.

In addition to doing your own online market research, to see what other units are renting for, I want to go over a few guidelines that we use in the real estate investing world that help you to determine what type of rent you should be charging, based on what the purchase price is.  

The One Percent Rule

The first rule is called The One Percent Rule. And, instead of a rule more of a guideline. And, it states that your gross rent should be one percent or more of the purchase price of the home or rental property. So, this is how it breaks down:

if you have a rental property that is valued at

$100,000, the rent should be $1000 a month.

$200,000 > $2000 a month.

$300,000 > $3000 a month, and on and on.

This is more of  a guideline for you to be able to quickly look at properties and look at market rents and see if the numbers make sense. The One Percent Rule is quite conservative and it's also for properties that are in a good neighbourhoods that have less risk.

The Two Percent Rule

The second rule is, The Two Percent Rule, so same thing as The One Percent Rule, but it's more for properties that are under  $100000, need a lot of work, and are in difficult areas so you're going to want to get more of a reward for putting money in a riskier investment. So, instead of needing one percent of the purchase price as rental income, you need two percent of the purchase price as rental income.

To me, a bit of a stretch and it's not a steadfast rule that I use in my real estate calculations, but I want you to be aware of these “rule of thumb” guidelines in the real estate investing world, so you can start applying them to properties that you're looking at, because really the most important skill as a real estate investor is to be able to analyze the numbers.

And, being able to figure out what the fair market value is for renting your property is a huge part of that.