What Is Rent Premium?
Rent premium is rent above market-rent. A unit renting for $1,400 when rental-comps support $1,250 has a $150 (12%) rent premium. It can come from upgrades, location, or a tenant who overpaid. At renewal, the tenant may negotiate down—or leave. Conservative-underwriting often assumes you lose some or all of the premium. Below-market-rent is the opposite: rent under market, often with upside at turnover.
Rent premium is the amount by which a property's actual rent exceeds market rent—often due to recent renovations, superior location, or favorable lease terms. It can be at risk when leases renew.
At a Glance
- What it is: Rent above market-rent
- Why it matters: At risk at renewal; affects noi projections
- Sources: Upgrades, location, tenant overpayment
- Underwriting: Often assume premium erodes at renewal
- Opposite: Below-market-rent has upside
Rent Premium = (Actual Rent − Market Rent) ÷ Market Rent
How It Works
Identifying premium. Run rental-comps. If your unit rents for $1,350 and comps average $1,200, you have a 12.5% premium. The tenant may be paying for a recent renovation, a view, or they may have overpaid in a hot market.
At renewal. When the lease expires, the tenant may ask for a reduction—or leave. If they leave, you re-rent at market-rent. Your effective-gross-income drops. Conservative-underwriting assumes you underwrite at market-rent, not current rent, when there's a premium.
Value-add angle. If you're buying a property with below-market-rent and plan to renovate, you're creating rent premium. Model the post-renovation market-rent, not the current rent.
Premium vs. gross-yield. A property with rent premium may show a high gross-yield today. If the premium erodes, that yield drops. Don't overpay for premium that may not last.
Real-World Example
Ava in Indianapolis. Ava looked at a 4-unit with $4,400 gross rent. Rental-comps supported $3,800. The seller had renovated 18 months ago and pushed rents. Ava assumed the $600 premium would erode at renewal—tenants would negotiate or leave. She underwrote at $3,800. Noi at that level: $1,520. At 6.5% cap, value = $233,846. The seller wanted $285,000. She passed. Six months later, two units renewed at $50–75 less. The premium was already eroding.
Pros & Cons
- Surfaces rent at risk
- Supports conservative-underwriting
- Informs sensitivity-analysis
- Prevents overpaying for temporary premium
- Requires good rental-comps
- Premium may persist in strong markets
Watch Out
- Overpaying for premium: Underwrite at market-rent when premium exists
- Renovation premium: Post-renovation premium can last if the product is superior—but still model conservatively
Ask an Investor
The Takeaway
Rent premium is rent above market-rent. It's at risk at renewal. Underwrite at market-rent when you see it—don't overpay for premium that may not last.