The following information was correct at the time of writing; however it’s an ever-evolving industry so we do recommend doing your own research.

Are you having a hard time figuring out what to charge for your rental property? Deciding on the right amount of rent is often difficult for landlords. If you want to learn what is market rent and how to set the right price, you have come to the right place. We will tell you what factors to consider in order to ensure you are charging your tenants fairly. Read on to find out:

• what factors influence market rent;
• why you should resist the temptation of overcharging and charging below market rent;
• how to calculate fair market rent.

To get started, watch this helpful video:

Market rent

Market rent is the rental amount deemed reasonable for both a landlord and tenant when it comes to a tenancy. This amount must be similar to what is charged for the same type of properties in similar locations.

Fair market rent

A fair market rent definition is: a method of calculating the level that rent should be set at for a property, i.e., by estimating the 40th percentile of gross rents for standard quality units based on recent move-in data.

Why landlords shouldn’t overcharge

While as a landlord, it may be tempting to charge a little extra for renting your property, this is not a good idea because:

• Overcharging can result in being investigated under the Tenant Fees Bill: Landlords can be asked to submit evidence to back up their fees and charges.
• Properties with rental levels set well above fair market rent value can be very hard to let: Empty properties are the worst-case scenario for landlords as they produce no income, and costs can mount quickly. Overcharging is the most common reason a rental property will stand empty.
• Overcharging means tenants are unlikely to stay in a property for long: If tenants think they are not being charged fairly, they are likely to look for a better deal and vacate a property as soon as their lease allows them to.

 

Why landlords shouldn’t undercharge

You may be surprised to learn that undercharging can actually be just as bad for you as landlord as overcharging. This is because:

• Landlords can face below market rent tax consequences: If you are not making profit from renting your property, you will not be eligible for tax deductions related to it.
• Undercharging tenants means losing money each month: Undercharging obviously decreases rental income and can result in landlords losing money on their property, as they will still have maintenance expenses.
• Landlords who undercharge do not have a void period “safety net”: Landlords always face the risk of some void periods, i.e., periods with no tenants, so they should always ensure to maximise their income while they can.

 

Key factors that influence market rent

Current market rent is determined by various factors. These include, but are not limited to, the following:

• Property type: Generally, properties are divided into several set categories. It is important to distinguish between different types of property when deciding what is fair market rent for a property, so as to charge appropriately:

1. house/townhouse (a self-contained property usually with land)
2. apartment (a property with self-contained and shared areas)
3. boarding house room (in a property shared by 6 or more people)
4. room (in a property shared by less than 6 people)
5. bedsit (a one-roomed unit consisting of a combined bedroom and a sitting room with cooking facilities)

• Location: Where a property is located is one of the most important factors affecting rental rates. Landlords renting properties that are close to amenities and transport hubs, in safe areas, will be able to charge more on “the market rent scale”.
• Interest rate: As the real estate market heavily relies on mortgages, when interest rates rise, rental prices tend to fall. This will play a role in how to determine fair market rent and, thus, how much landlords can charge for their properties.
• Inflation: Inflation will increase rental prices, since high mortgage rates mean less home purchasing power and, therefore, higher demand for rentals. Landlords wondering how to determine market rent must keep up with inflation statistics.
• Supply and demand: To answer “what is the market rent for my property”, landlords have to consider supply and demand in their area in a particular period of time in order to decide what to charge. If a type of property is in short supply in an area, then rent will be higher than average.

Methods for defining the rent amount

To answer “what is fair market rent in my area” and figure out the rental amount you should be charging, you can use one of the following methods:

1. Analyzing rental bond data on your own

You can use rental bond data to determine the ideal rent amount. This data provides information on the activity level in the housing rental market since 1993. Analyzing it will give you an idea of what private sector landlords’ bonds were, starting from January 1993.

The advantage of this method is that it is free and contains a depth of information going a long way back. However, you could possibly make mistakes if you’re not careful and don’t analyse the latest available file, as there are some technical particularities with the database.

2. Analyzing MBIE market rent data on your own

Studying Ministry of Business, Innovation and Employment (MBIE) data can also help you determine rental price. MBIE publishes rental price data, which is used in regional housing reports and other publications.

The advantage of this method is that it will give truly reliable data, as every landlord that receives a bond is required to lodge it with MBIE. However, the data does not distinguish between furnished and unfurnished properties, which is something that also affects rental prices.

3. Analyzing TradeMe market rent data on your own

Using data from the Trade Me Property website can also help landlords figure out what they should be charging. Trade Me Property produces data on median rent statistics.

The advantage of this method is that it is straightforward and reliable, coming from New Zealand’s biggest property website. However, one should remember that it only captures the weekly rent for new rentals on the market for individuals who choose publicly advertised rentals, not private ones.

4. Using the online market rent calculation tool offered by Tenancy Services

The online tool on the Tenancy Services website is another way to calculate what market rent should be for a certain property type. The tool acts as a fair market rent database that provides bond information for properties.

The advantage of this method is that it automates rent calculations, so landlords only have to input some simple information instead of doing a complex market rent analysis. The website does specify, though, that this data should not be used alone to determine one’s rent – more factors need to be taken into consideration.

When using the online tool, you will encounter the following terms:

• Size: Number of bedrooms in a property.
• Active bonds: The number of bonds received that had complete information about weekly rent, house type and other factors in that six-month time period.
• Lower quartile: The weekly rent at 25% of all market rents.
• Median rent: The middle value when all of the weekly rents are placed in order of value.
• Upper quartile: The weekly rent at 75% of all market rents.

5. Consulting a Property Manager

If you do not want to analyse data on your own, as a landlord, you also have the option of consulting a Property Manager.

Some advantages of this method are the following:

• A Property Manager will expertly analyze past and current rental data from your area, eliminating guesswork.
• When determining the right rental price, a Property Manager will be able to correctly factor in landlord costs and property expenses, like maintenance and repair costs.
• A professional Property Manager can also help landlords lower their property-related expenses, due to their contractor connections, and, therefore, maximise their profits.
• Working with a Property Manager means landlords don’t have to worry about consistent cash-flow, as rent will always be collected on time.
• Hiring a Property Manager guarantees that landlords will stay up-to-date with legislations that could affect rental rates and, thus, will always be adjusting their prices and charging appropriately.
• Shorter periods of vacancy. Not only will a property management company advertise to fill vacancies, but it will also maximize revenue.

 

Market rent FAQ

1. How to calculate market rent?

For a fair market rent calculation, you will need information on your home’s value. Your rent is typically around 0.1% of its value.

2. Where can I find a good fair market rent calculator online?

To use a fair market rent calculator online, head here.

3. Does fair market rent include utilities?

Fair market rent includes essential utilities, like gas or electric, on top of rent but it does not include non-essential ones.

4. Does charging less than fair market rent result in extra taxes?

Renting below market rate means you are not eligible for tax breaks related to the rental use of your property. If you are not making a profit, you will not be able to deduct certain rental expenses.

5. What does mid-market rent mean?

Mid-market rent refers to homes for rent to households on low incomes. Mid-market properties are rented at lower-than-average prices.

6. What is market rent vs contract rent?

Market rent is also known as face rent, and it is the rental price that your unit would get right now if it were to be listed. On the other hand, contract rent is the amount actually paid right now by long-term tenants. This amount is normally lower than market rent rate.

7. What is market rent vs effective rent?

As explained in the market rent definition above, this is the rental amount payable as set out in the lease agreement or rental price listed by the landlord. Effective rent is this amount a landlord receives after paying all expenses for related to operating the property.

Set the right price!

Deciding what to charge for your rental property as a landlord is not an easy task. If you overcharge, you could lose the trust of your tenants, but if undercharge, you could be shooting yourself in the foot. When it comes to rental prices, you need to find that sweet spot that ensures you are making profit, but your tenants are also happy.

There are several ways of calculating fair market rent by yourself online, but if you need expert help, click on the FREE RENTAL APPRAISAL link.