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What Is a Rent Premium?

Jim B.
Jim B.

A rent premium is a feature of a specific technique for buying a home known as lease-to-own. This method allows potential buyers the opportunity to live in the house and pay rent while ultimately giving them the option to purchase the house. In addition to the normal rent, the person renting the home must also pay an additional fee, known as the rent premium, which is subtracted from the purchase price of the house if the renter exercises the option to buy. If there is no eventual purchase, the seller of the house gets to keep this extra premium.

Many people wish to buy homes but lack the necessary funds to make these wishes into reality. An option for people who fall a bit short is the lease-to-own option, which combines elements of renting and buying. The seller of the home allows the potential buyer to lease the house with monthly rent payments, but also charges additional fees on top of the monthly rent. One of these fees is the rent premium, a feature that is unique to lease-to-own.

Man climbing a rope
Man climbing a rope

The person who is renting the home must not only come up with the rent to live in the home in a lease-to-own arrangement, but he also must pay a monthly rent premium. Most lease-to-own options are complete within a period of a few years, at which point the renter must decide if he wants to buy the home. If he does decide to buy, all of the premium payments will be added up and subtracted from the purchase price.

For example, imagine a seller agrees to a lease-to-own agreement that calls for a rent premium of $200 US Dollars (USD) per month and gives the renter the option to purchase the home after three years. The purchase price of the home is $80,000 USD. After three years, or 36 months, the renter will have paid $7,200 USD in premiums. If he decides to purchase, the price will be reduced to $72,800 USD, which is the original $80,000 USD minus the $7,200 USD of premiums.

Using a rent premium protects the seller from losing out completely if the renter decides to walk away from the option to buy the home. If that were to occur, all of the premium payments would be kept by the seller. The ability to collect the premiums, along with the option fee charged to the renter in a lease-to-own arrangement, can make the situation profitable for a seller even if the option to buy is never exercised.

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