When renting out a property, you need to decide if you wish to offer your tenants a lease or a rental agreement. Although these terms are often used interchangeably, they are not the same.
A lease for a rental property has a finite term, such as six months or a year, for which a tenant will agree to rent the property. During the duration of the lease, the tenant and the landlord are bound to uphold the terms of their written agreement.
Having a lease means that neither party may change any terms of the agreement until the lease expires, unless both parties agree to the change.
Under a lease, tenants are obligated to make monthly rent payments as agreed upon, as well as follow any code of conduct or other stipulations in the lease while it’s in effect. It also means that a tenant may not vacate the property without breaking their lease. In some cases, the tenant may be held liable for the remaining amount of rent due under the lease, or they may be required to find another person to fulfill their end of the lease.
A lease is generally used for landlords who prefer the stability that comes with locking in a tenant for a specified period of time. If you have a mortgage payment to meet, having this set amount of income can help you budget your expenses. Most tenants are familiar with long-term leases, and will not have a problem committing.
Rental agreements differ from leases in a number of ways. Standard rental agreements are month-to-month, and there is no set period of residence. Both the landlord and tenant are free at the end of each 30-day period to make changes to the rental agreement, subject to any rent control laws.
These changes may include a rent increase, modification of terms of the rental agreement, or a request to vacate the property. However, in most states, both landlord and tenant are required to give 30 days’ notice before any changes can be made. If your state does not require a notice, you are free to change any part of the rental agreement at your discretion.
Rental agreements are useful for landlords who are having difficulty attracting new tenants, especially if they are in areas that cater to students or professionals on the move. They appreciate the freedom a month-to-month agreement provides, and landlords who offer these arrangements may have an edge over landlords who require long-term leases.
A rental agreement is typically auto-renewed without notice after each 30-day period has elapsed, as long as neither party has stated that the tenant will vacate the premises.
Before you rent out your property, you will need to take into account the differences between a lease and a rental agreement. This will allow you to make the best decision for your needs.
The vast majority of landlords prefer fixed-period leases. There is more security for a landlord when a tenant signs a fixed-period lease, and long-term leases can help relieve a landlord’s stress about meeting a mortgage payment on the property.
However, there are definite benefits to offering month-to-month leases. Here are just a few:
- You can attract more tenants. Many prospective tenants do not want to be tied to a long lease. A month-to-month rental agreement is much more attractive to first-time renters, college students, renters who may be transferred or travel extensively, and renters who just prefer avoiding a long-term commitment. Although this may mean a higher rate of tenant turnover, you may reduce vacancy rates by catering to this type of tenant.
- It is easier to identify problem tenants and take action quickly. Without a long-term lease, getting rid of a problem tenant is much easier. In most states, all you need to do to terminate a month-to-month agreement is give written notice (usually 30 days). (Note, however, that some local laws prevent evictions without good causes.)
- It is easier to raise the rent. When you have a set lease period, you cannot raise your tenant’s rent until the lease term is over. If your expenses go up during this period, your profit margin is reduced. A month-to-month lease allows you to increase rental rates when you need to, instead of waiting for a lease to expire.
You can also charge more for monthly rents. People are more likely to pay more for rent if they are not worried about maintaining this amount over a long period of time. For some landlords, higher rent amounts can make up for the lack of security in a month-to-month arrangement.
- You can maximize your success in certain areas. If your rental property is in a location that appeals to vacationers, college students, or other short-term renters, a month-to-month lease can make your property more desirable.
Month-to-month leases may not offer the security of a long-term lease, but they can make your rental property more attractive to a variety of potential tenants. This can help decrease your vacancy rates, limit your damages, and provide a steady stream of income.