Fair Market Rent: a Guide to Housing Affordability

4.4 million households received support through rental assistance programs in 2023. Many of these programs partner with private landlords to offer housing options for low-income families, the elderly, and individuals with disabilities. If you're a landlord considering these programs, understanding fair market rent (FMR) can help you determine if it's a good fit for your property.

This article covers what fair market rent is and how the government calculates these rates. You'll learn about the data collection process, how geographic adjustments are made, and the programs that use FMR. We'll also explore the pros and cons of using fair market rent as a landlord, and provide inights on ways to optimize rental property management.

This guide provides details about government-set rent values and how they might affect your rental business, helping you make choices about your property investments.

What does fair market rent mean?

Fair market rent represents the estimated amount a property could rent for in the local housing market. It's a key figure used by the government to determine payment levels for various housing assistance programs.

Each year, the U.S. Department of Housing and Urban Development (HUD) sets these values using a combination of national surveys and local rental data. This process allows for adjustments based on local conditions, demand, and property features.

The goal is to strike a balance that works for all parties involved, including those needing housing assistance and the landlords providing it. If FMR values are too low, private landlords might be less likely to participate in programs like the Housing Choice Voucher Program (also known as Section 8). This reduction in participation could lead to fewer housing options for individuals and families on assistance program waitlists.

How is fair market rent calculated?

There are several components the government uses to calculate fair market rent:

Data collection

HUD gathers data from multiple sources:

• American Community Survey (ACS):The ACS, conducted by the U.S. Census Bureau, provides gross rental data from across the country. This survey collects data annually from a sample of households and uses mail and phone questionnaires.
• American Housing Survey (AHS): HUD and the U.S. Census Bureau collaborate on this survey for additional information on housing conditions. This data gets collected every two years and covers things like the physical condition of housing units, neighborhood quality, and housing costs. The AHS provides a more detailed picture of the housing market.
• Rental listings: HUD also collects data from rental listings to get more real-time information on current asking rents for available units. They review online rental platforms and newspapers, and they check with property management companies.

Median gross rent analysis

HUD reviews the collected data to identify median gross rents for rental housing units. They factor out certain types of housing and create benchmarks. These details include the following:

• Standard quality: These units meet HUD's Housing Quality Standards (HQS), which are the minimum criteria for health and safety. These rental units don't have any defects in areas such as plumbing, heating, electrical systems, upkeep, and hallways.
• Recent construction: They focus on established rental markets for existing properties and remove units built in the last two years from their calculation.
• Non-subsidized: The agency removes units subsidized through other housing programs from the fair market rent calculation.
• Sizing: HUD sets fair market rents for rental units of different bedroom sizes.
• Market rate: The data HUD gathers is for units available in the private rental market, not public housing or other specialized housing types.
• Consumer Price Index (CPI) data: If an area has CPI data, HUD leverages this information using an assumed annual rate of increase of around 3%. For other areas, HUD uses regional CPI rental indices or special random digit dialing surveys to update and project FMRs.

Geographic adjustments

HUD accounts for variations in the cost of living and economic conditions across different areas, to make sure fair market rent values are appropriate for each specific housing market. To find the fair market rents for your area, you can use HUD's FMR dataset and search tool.

This tool allows you to submit your state and county or ZIP code to determine current and historical fair market rents. A quick comparison between small area fair market rent data and current listings on Apartments.com for Phoenix showed that the fair market rents are in line with current market rates.

Current data for 2024 shows the local survey data results for one-bedroom units in these metropolitan areas:

• Harris County, TX: $1,135/month
• Los Angeles County, CA: $2,006/month
• Miami-Dade County, FL: $1,884/month
• New York County, NY: $2,451/month
• Cook County, IL: Data further broken down by zip codes

40th percentile calculation

HUD calculates the 40th percentile rent level, meaning that 40% of standard quality rental housing units in the area have rents at or below this level. This confirms the fair market rent values are neither too low nor too high.

Annual publication

HUD publishes fair market rent values annually for about 2,500 areas across the U.S. Landlords can access these updates on October 1, the start of the federal fiscal year. These new values take effect 30 days after HUD posts them.

Programs that use fair market rents

The various housing assistance programs that leverage FMR data include the following:

• Housing Choice Voucher Program: This Section 8 program helps low-income families, the elderly, and individuals with disabilities afford safe and clean housing in the private market. Participants receive rent vouchers to rent a home of their choosing, provided the landlord agrees to participate. The participant pays around 30% of their adjusted gross income and the voucher covers the rest of the rent. This program is mostly for private rentals but the local public housing authority might also leverage housing choice for public housing units.
• Home Investment Partnerships Program (HOME): This program provides grants to states and localities to fund projects that build, buy, and rehabilitate affordable housing for rent or homeownership. States and localities use HOME funds in partnership with local nonprofit groups to finance housing development, provide direct rental assistance to low-income individuals, and offer down payment assistance to homebuyers.
• Moderate Rehabilitation Single-Room Occupancy (SRO) Program: SRO is part of section 8, and. it provides rental assistance for low-income and homeless individuals in need of affordable housing. This program rehabilitates existing buildings to create single-room units with shared kitchens and bathrooms. The rental assistance helps cover a portion of the rent to make the units more affordable for tenants.
• Emergency Solutions Grants (ESG) Program: ESG provides funding to states, local governments, and nonprofit organizations to support services for homeless individuals and families. ESG funds apply for short-term and medium-term rental assistance to help homeless individuals and families quickly move into permanent housing and achieve stability.
• Local government programs: States and cities may also use FMR for various purposes, including rent control guidelines, affordable housing developments, workforce housing initiatives, and other rental assistance programs.

Pros and cons of using fair market rent

Should you use fair market rent as part of your analysis for setting rental rates? Here are some pros and cons to consider:

Pros

• Market alignment: Using FMR can help your rental rates align with the broader market, which can attract tenants looking for reasonable and fair pricing.
• Stability: HUD updates FMR values each year which can be a stable benchmark of current economic conditions and housing market trends.
• Government compliance: For property owners who participate in housing assistance programs, setting rental rates based on FMR verifies compliance with HUD guidelines and eligibility for rental subsidies.
• Fairness: FMR helps in setting rents that are neither too high nor too low, providing a fair deal for both landlords and tenants.

Cons

• Market limitations: FMR may not fully capture local market nuances. This can be especially true in rapidly changing neighborhoods or unique property conditions. This could lead to underpricing or overpricing for the actual rent.
  Landlords have mixed experiences with Section 8 and fair market rent. As Reddit user JoshuaLyman shares, "We haven't taken section 8 in a while. But we did take section 8 for decades in more than one MSA. Over time we would fluctuate our openness to it. That was largely if not exclusively based on rents Sec 8 would pay. We found that sometimes they were ahead of the market, sometimes significantly lagged."
• Lack of flexibility: If you only use FMR, this can limit your ability to adjust rent based on specific property features, improvements, or competitive advantages.
• Tenant expectations: Tenants familiar with FMR may expect rents to be strictly within these limits, which can cause friction if landlords need to set higher rates to cover costs and generate investment returns.

Managing rental properties

No matter which approach you use to determining your rent, optimizing your daily operations helps to increase the profitability of your investment. Using property management software like Azibo can streamline various aspects of your rental business. Here's how:

• Rental applications: Simplify the application process by allowing potential tenants to apply online. This saves time for everyone, reduces paperwork, and enables faster processing of applications.
• Tenant screening: Automate background checks, credit reports, and rental history verification. This helps you choose the best tenants and potentially reduce the risk of payment defaults or property damage.
• Lease agreements: Create state-specific legally-compliant lease agreements. This gives you consistency across properties, reduces legal risks, and saves time and costs of drafting individual agreements.
• Rent collection: Make collecting rent easy with online rent payments, automatic reminders, and real-time tracking of status. This improves your cash flow, reduces late payments, and minimizes the time spent on manual rent collection and bookkeeping.
• Maintenance and messaging: Allow tenants to submit maintenance requests online. Azibo helps improve communication between landlords, tenants and service provides. This also increases resolution of issues, improves tenant satisfaction, and helps you maintain your property.
• Document storage: Azibo provides secure cloud-based storage for leases, invoices, and other important documents. This helps you stay organized and gives you easy access to information when you need it.
• Accounting: Automate tracking of expenses and income. Simplify your tax preparation and reduce bookkeeping to minimize errors and save valuable time.
• Financial management: Azibo provides tools for budget planning, forecasting, and financial analysis.This helps you increase property performance and plan for future investments or improvements.

Fair market rent HUD

Fair market rent data helps landlords understand the rates around housing assistance programs. FMR provides a standardized benchmark for rents, balancing the needs of tenants, landlords, and government agencies.

While FMR offers benefits like market alignment and stability, it also has limitations in capturing local specifics. Landlords should weigh these factors along with their specific property features and business goals when setting rents.

Regardless of your approach to rent-setting, efficient property management helps support a successful rental business. Using modern tools and software can streamline operations, from tenant screening to maintenance requests, so that you can focus on growing your investment.

Fair market rent: FAQs

What's the most Section 8 will pay?

Section 8 will pay the difference between 30% of the tenant's adjusted gross income and the fair market rent or the payment standard set by the local housing authority, whichever is lower.

How does the IRS determine fair market rent?

The IRS determines fair market rent using comparable rental rates for similar properties in the same area, considering factors like location, size, condition, and amenities. They use tools such as rental market surveys, real estate websites, local rental listings, and HUD's fair market rent data.

How to determine the market value of a rental property?

To determine the market value of a rental property, compare it with similar properties recently sold or rented in the same area, consider potential rental income and expenses, and use online valuation tools or a professional rental appraisal for an expert evaluation.