Competitive Rent versus Fair Market Rent

Fair Market Rent

What is Fair Market Rent?

Fair Market Rent is the standard used to estimate the appropriate rent rate of a property with a certain number of bedrooms, a certain number of bathrooms, in a specific geographic area of the country.

Fair market rent is a gross rent estimate that includes the base rent, as well as any essential utilities that the tenant would be responsible for paying, such as gas or electricity. It does not include non-essential services such as telephone, television, or Internet.

  • HUD arrives at the fair market rent numbers for each area with the help of census data and through renter surveys.
  • Every year, HUD compiles a list of the Fair Market Rents for over 2,500 metropolitan and non-metropolitan counties.

How Is Fair Market Rent Used?

Fair Market Rent is used to determine rental voucher amounts for government assistance housing programs such as Section 8 (Housing Choice Voucher Program).

What Is Section 8?

Section 8 is a program that provides financial assistance to specific individuals to help them afford to rent a home. The program gives housing vouchers to these individuals. To qualify to receive a voucher, you cannot make more than a certain amount of money each year based on the number of people in the household.

If a landlord agrees to rent to a Section 8 tenant, the Section 8 program will first inspect the property to make sure it meets specific standards. If the property passes the inspection, then the landlord will be paid each month directly by the Section 8 program.

Unless you need Section 8 tenants to keep your units occupied, Envest Realty recommends you do not participate in the Section 8 program due to the control of rent rates that you would be submitting your properties to as a Section 8 landlord. Not only does your payment method differ under Section 8, but you also face the federal government regarding availability and qualification rules.

Section 8 Qualification Levels

Each year HUD sets income limits per family, which are in three categories. The actual income levels will differ based on the geographic area. Income levels are calculated based on a percentage of the area’s median income level for where your property is located.

  • Extremely Low Income – 30 percent of the area’s median income level
  • Very Low Income – 50 percent of the area’s median income level
  • Low Income – 80 percent of the area’s median income level

HUD grants priority for Section 8 vouchers to those who would be classified as extremely low-income levels and then to those with very low-income. Participants with low-income status are typically last in line. Still, they could be granted a Section 8 voucher if they were classified as “continuously assisted” by public housing programs or those who are in HUD-assisted homeownership programs.

If you decide to rent your property to Section 8 tenants, your unit must meet specific Section 8 criteria. HUD uses a two-part process that involves examining the price of the rental, as well as the health and safety condition of the property. To determine if the rent on your property is reasonable, the local HUD Section 8 office will use several criteria to compare it to other properties in the area. Here are five times they will look at the “Rent Reasonableness” of your property.

  1. Initial Approval. When a landlord is trying to have their unit approved as a Section 8 rental property.
  2. Increasing Rent. When the landlord of a current Section 8 tenant wants to increase the tenant’s rent.
  3. Lease Renewal. When a tenant’s lease is up for renewal, the Section 8 office must compare the Fair Market Rent from one year ago to the Fair Market Rent that is in effect 60 days before the contract expires. If the Fair Market Rent decreases by at least five percent compared to the previous year’s Fair Market Rent, the unit must be reexamined to determine if the amount that will be paid to the landlord is rent reasonable.
  4. Under HUD’s orders. This often occurs when HUD wants to review how the PHA is allocating funds and conducting operations.
  5. At HUD’s Discretion. When the Public Housing Authority feels it is necessary to do so.
Envest Realty - Fair Rent Market