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Fair market rent is the amount of rent a property could reasonably fetch, given the current market, location, and other conditions, if it were made available for rent or lease. Property owners use fair market rent data to decide how much they should charge, and make adjustments as necessary, such as lowering rent in a slow economy where renters may have more options. This value can also be important for government benefits awards, as housing assistance depends on fair market rent.
In any given region, government agencies maintain rental statistics. They will provide information about average rents and often offer it in the form of percentiles so landlords can see where a rent falls within the community. Fair market rent typically falls around the 40th or 50th percentile. These statistics can also break down numbers by type of dwelling and location to provide more detailed information. A three bedroom house, for example, should fetch more in rent than a studio, while a house in a desirable location will cost more than a comparable home in a lesser area.
For landlords, the fair market rent can determine how much to ask for a new rental, and how much to negotiate when discussing rent increases and other changes with tenants. The landlord wants to advertise the property at an appealing price, without making the price too low. Property buyers considering investment purchases must also consider the rent they are likely to be able to charge, as it will determine whether they can pay back the loan and generate a profit.
Government benefits peg housing allowances to fair market rent. The goal of such benefits is to help low income people with rentals, not to put them in any rental they want. The government provides money appropriate for the fair market rent in the area, and the applicant must pay additional rent out of pocket. These benefits allowances undergo regular adjustment to compensate for cost of living increases, especially in areas where there is a great deal of growth and rents may be trending upward.
Sometimes fair market rent is a consideration for tax rates as well. Tax authorities may have an interest not in the stated value of the property, but in how much money it can bring in during the course of a given year. Information on reasonable rent rates will allow the tax collector to determine how much money the property should be generating, so she can price the tax bill accordingly.