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Fair Rental Value calculator: How do I calculate Fair Rental Value?

Updated: Sep 21, 2022

Home valuation is a highly contentious point in real estate transactions especially when it comes to buying and selling homes. It can also be a problem for insurance companies and adjusters when determining the extent of damage and home valuation. It's important for finding like, kind housing following a CAT event and temporary housing.

At Catale, a temporary housing company, we provide market precision valuations and break down monthly rental rates to make it easy for the adjuster and carrier to provide rental property rate approval. The Fair Rental Valuation is one of the first steps in the long term temporary housing process.

how to calculate fair rental value of furnished home
how to calculate fair rental value of furnished home

What is Fair Rental Value (FRV)?

Fair Rental Value, also known as FRV, is the process by which experienced housing experts perform an in-depth market valuation on the rental value of a home. This is commonly used in the insurance world and is one of the early steps to adjuster and insurance carriers. This is necessary to help place the displaced insured start the temporary housing process, while their home is being rebuilt. Typically housing experts will start with the house value and study comparable rental properties looking at amenities, square footage, and location.

Fair Market Rents (FMRs) are set by the Department of HUD each year. FMRs are used to determine standard payment amounts for Section 8 housing and other government housing assistance programs. Typically, in the insurance industry these numbers serve as a starting point for rentals and provide a baseline to begin the search for housing that best fits the policyholder.

What is Fair Market Rent (FMR) vs. Fair Rental Value?

Fair Market Rent, also known as FMR, is the monthly rent that the market will currently bear. Fair market rent tends to reflect the market, where fair rental value tends to focus more on an individual's own home valuation. Typically, it depends what side of the coin you are on: landowner or renter. The renter uses FMR to figure out what is a current neighborhood or amenities will provide and the landlord looks at value. Both are used in the insurance industry when determining rental rates.

How do you determine the fair market value of rental property?

The fair market value of a rental property can be determined in many ways. Looking at amenities, location, comps and baseline numbers. Many people believe the IRS plays a role in rental costs, but IRS plays no role in fair market rental. Department of Justice and the Fair Housing Act prohibits discrimination by housing providers, lending institutions, and homeowners' insurance companies. The HUD Section 8 program pays rents for low-income households directly to private landlords. In most cases, the housing authority will pay about 70% of a tenant’s rent, while the tenant will pay the remaining 30%.

Fair Market Rents generally determine the maximum rent that a Section 8 landlord will be allowed to charge their residents. However, landlords have some flexibility to charge based on the number of bedrooms/bathrooms/square footage or amenities such as central A/C, a balcony, or new finishes. The rental rate will require approval by the housing authority and the process may involve some negotiation.

The 50% rule is a guideline used by real estate investors to estimate the profitability of a given rental unit. As the name suggests, the rule involves subtracting 50 percent of a property’s monthly rental income when calculating its potential profits. According to the rule, 50 percent of the rental income should be designated to expenses and therefore not considered when comparing potential profits against the monthly mortgage or loan repayments.

The purpose of the 50% rule is to help investors make quick, informed decisions about rental properties. One of the most common mistakes property owners make when searching for deals is underestimating the cost of expenses. This can lead to lower profit margins, or in some cases an unsuccessful deal altogether. Essentially, investors will incorporate the 50% rule into their initial review of a deal as a way to protect against unexpected costs and expenses.

The 2% rule in real estate is a rule of thumb which suggests that a rental property is a good investment if the monthly rental income is equal to or higher than 2% of the investment property price. For example, for a $200,000 rental property, the rental income has to be at least $4,000 to meet the 2% rule (ie, $200,000 * 2%). And the rental income for a $50,000 investment property has to be at least $1,000, and so on. The price-to-rent ratio is the ratio of home prices to annualized rent in a given location. This ratio is used as a benchmark for estimating whether it's cheaper to rent or own property.

The price-to-rent ratio is used as an indicator for whether housing markets are fairly valued or in a bubble. In simple terms, the price to rent ratio is defined as the ratio between the average property price and the average rent per year in any housing market. Price to Rent Ratio Formula = Average Property Price/ (Average Monthly Rent x 12). Example: The average property price in the Dallas real estate market equals $389,600, while the average monthly rent amounts to $1,800. Applying the formula above:

Price to Rent Ratio in Dallas, TX = $389,600/$1,800 x 12 = 18 Is this value high or low? Is 18 an ideal price to rent ratio for profitable renting out of investment properties in the Dallas housing market?Real estate experts use the following guide to determine ideal price to rent ratio: Low: 0-15, Moderate: 16-20, High: 20+.

Fair rental value calculator for insurance adjuster purposes

Insurance Adjusters calculating ALE benefits is typically done at the carrier level when the policy is issued, it can be revisited depend on what the policy outlines. Typically ALE is determined by taking 20% of the policyholders home valuation from a certain date and time usually determined by the insurance carrier. ALE addition are permissible and can occur if work lasts longer than expected.

Fair Rental Value calculator: How do I calculate Fair Rental Value?

Fair Market Rent by ZIP Code Method

Similar to a real estate agent finding comps to sell a home, Fair Market Rent can often be a difficult number to fully grasp. Most people think of going to Zillow and punching in a zip code to determine values. While this is one resource that is available, oftentimes the information is outdated or incorrect and can lead to misleading analytics and incorrect valuations. Typically Zillow does not provide exact numbers, it serves as a rental baseline. It’s a good place to start, but other resources should be consulted to provide a more robust and accurate rent. This link can serve as a good way to look at zip code FMR: /

The Zillow Rent Zestimate® Method

Typically Zillow does not provide exact numbers, it serves as a rental baseline. It’s a good place to start, but other resources should be consulted to provide a more robust and accurate rental rate. The Zillow rent calculator runs a large algorithm and with that comes some inaccuracy, that’s why it is important to study the market and complete the due diligence to see where properties are actually available. This link will lead you to Zillow Zestimate for rentals:

Other Automated Rent Calculator Tools

Other housing websites could be referenced to provide rental rate information:

The Rental Listing Method

The coffee house method is another way to determine localized rental rates. It often requires someone to be very involved and close to the housing industry. Determining rents by word of mouth, or studying the classified ads in local newspapers, or studying craigslist these are all viable solutions. Often times it requires a boots on the ground presence or agent to fully understand the rates.

How to calculate fair rental value of furnished home?

To calculate the Fair Rental Value (FRV) Coverage of a furnished home, the homeowner should take a detailed inventory of the contents of the home, retain a document of the items and their values, this would all factor in as part of the fair rental value of the home. Fair rental value insurance coverage does include the full dwelling as well as contents of the dwelling.

Is fair rental value the same as loss of use?

Fair rental value is not the same as loss of use. Loss of use or additional living expenses encompasses more expenses than rent, varying from extended mileage, utilities, restaurant meals while displaced, boarding costs, and storage fees.

What is fair rental value on homeowners insurance?

Fair rental valuation and homeowners' insurance is closely intertwined following some type of natural disaster or accident that deems the house "unlivable," by the insurance carrier. FRV always the adjuster to find like in kind housing for the displaced policyholder. Helping them find temporary housing following a claim event.

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