What Is a Rent Premium? Benefit, Example, 5 Facts

When interacting with brokers, property managers, and other investors in commercial multifamily real estate, there is a certain vocabulary used. 

To avoid seeming like a newbie and to be taken seriously, a real estate investor must be well-versed in the lingo. Let’s break through one of these words for one minute.

A rent premium is the rent increase that results from a significant renovation of an apartment.

During the underwriting process, the Rent Premium is the general partner’s estimation of the rent based on the rental prices of comparable or previously refurbished apartments in the vicinity.

What Is a Rent Premium?

Lease-to-own is a specialized method for purchasing a house that includes a rent premium. This strategy allows prospective purchasers to reside in the property and pay rent while ultimately having the option to purchase the home.

What Is a Rent Premium?

In addition to the standard rent, the individual renting the home must pay an extra cost known as the rent premium, which is deducted from the purchase price of the home if the renter exercises the option to buy. If there is no final sale of the home, the seller retains the additional premium.

Numerous individuals desire to own a property but lack the financial means to do so. The lease-to-own option, which combines aspects of renting and purchasing, is available to those who fall just short.

The seller of the home permits the prospective buyer to lease the property for a monthly rent payment, but also levies extra expenses. The rent premium, which is exclusive to lease-to-own, is one of these expenses.

Benefit Of Rent Premium

In a lease-to-own agreement, the renter must additionally pay a monthly rent premium in addition to the rent. Most lease-to-own agreements end within a few years, at which point the tenant must decide if he wishes to purchase the property.

What Is a Rent Premium?

All premium payments will be put together and deducted from the purchase price if he decides to purchase.

Example Of Rent Premium

Suppose, for instance, that a seller agrees to a lease-option deal that requires a monthly rent premium of $200 US Dollars (USD) and provides the renter the opportunity to purchase the property after three years. The residence may be purchased for $80,000 USD.

The tenant will have paid $7,200 in premiums after three years, or 36 months. If he agrees to buy, the price will be cut to $72,800 USD, which is the difference between the initial $80,000 USD price and the $7,200 USD surcharges.

Special Point

Using a rent premium safeguards the seller against total loss if the renter decides to forego the chance to purchase the house.

What Is a Rent Premium?

Consequently, the seller would retain all premium payments. Even if the option to purchase is never exercised, a lease-to-own agreement can be beneficial for the seller due to the possibility to collect premiums and the option fee imposed to the lessee.

Rent Premiums FAQ

Is rent to own more expensive?

Yes. The tenant must pay an upfront option fee and a monthly rent premium in addition to the base rent.

What is a rent to own home?

In a rent-to-own agreement, the renter rents the property for a certain number of years at a fixed rental rate, with the opportunity to purchase the house at the conclusion of the lease.

What is an option fee and rent premium for?

The tenant must pay a one-time option charge upfront in addition to a monthly rent premium on top of the base rent. If he decides to purchase the home in the future, the money accrued from the monthly rent premium and the option fee is counted toward the down payment.

What Is a Rent Premium?

What if I decide not to buy a rent to own home?

If the renter decides not to purchase the property at the end of the lease, either because the property is defective or because he is ineligible for a mortgage, the renter forfeits the down payment.

Does it make sense to rent to own a home?

Buyers are afforded additional time to amass the necessary finances and credit to complete the purchase. Before spending more funds, they may also do a complete inspection of the home during the lease term to ensure that the property is in excellent shape.

Conclusion

A rent premium is the difference between the rent you charge your tenants and what it would cost you to buy that same property.

What Is a Rent Premium?

This is calculated by taking the annual return on investment for that property, and subtracting out taxes. That gives you the amount of money you can expect to make over the life of the lease.

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Pat Moriarty
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