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A rental premium is a feature of a specific technique for buying a home known as renting. This method allows potential buyers the opportunity to live in the home and pay rent, while also giving them the option to purchase the home. In addition to the normal rent, the tenant of the home must also pay an additional fee, known as a rental premium, which is subtracted from the purchase price of the home if the tenant exercises the option to purchase. If there is no eventual purchase, the seller of the house takes this extra premium.
Many people want to buy a home but don’t have the funds to make those wishes come true. One option for those who are a bit short is the self-lease option, which combines rental and purchase elements. The home seller allows the potential buyer to rent the home with the monthly rent payment, but also charges additional fees on top of the monthly rent. One of those fees is the rental premium, a feature unique to property leasing.
The person renting the house must not only pay rent to live in the house on a lease basis, but must also pay a monthly rental premium. Most home rental options are completed over a period of a few years, at which point the tenant must decide whether to purchase the home. If he decides to buy, all premium payments will be added to and subtracted from the purchase price.
For example, imagine that a seller agrees to a lease that requires a rental premium of $200 US dollars (USD) per month and gives the tenant the option to purchase the house after three years. The purchase price of the house is $80,000 USD. After three years, or 36 months, the renter will have paid $7,200 in premiums. If he decides to buy, the price will drop to $72,800 USD, which is the original $80,000 USD minus the $7,200 USD in prize money.
The use of a rental premium protects the seller from losing out entirely if the tenant decides to forgo the option to purchase the home. If this were to occur, all premium payments would be retained by the seller. The ability to collect premiums, along with the option fee charged to the lessee in a property lease, can make the situation profitable for the seller, even if the purchase option is never exercised.