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The Differences Between A Regular Lease And A Rental Agreement
When you get too specific with terms and jargon in investments, sometimes people might feel that you are thinking too much.
But words and specific labels can play a huge role in legal matters in determining whether you win or lose.
Usually when you sign up a tenant, you just get him to sign a legally binding contract for rental of the house. And that is it. Seldom do landlords, especially inexperienced ones, even think about whether the contract leans more towards a regular lease or a rental agreement.
Note that when in doubt, you should always consult a proper real estate attorney familiar with local laws when it comes to contracts.
A written rental agreement is a contract to rent a house to a particular tenant for a short period of time. Usually for a month at a time on a rolling basis.
If no notice to terminate or cancel is made, it automatically renews every month.
State laws usually require landlords to provide at least a 30 day written notice to inform tenants of termination. While tenants are also usually required to provide a 30-day notice for cancellation of the rental agreement.
In fact, this 30 day notice is required for activities such as:
- rent increase
- change of term
The main difference between rental agreements and leases is whether the contract is a short or long term agreement.
A lease is usually an agreement for rental of a house for at least 1 year or more.
This can be seen as a reason why commercial property contracts are always called leases instead of rentals. Because businesses often rent their properties for more than a year at a time. Usually 3 years.
When it comes to fixed-term leases, the landlord is prohibited to raise rental or make changes to terms while the lease is in effect. Proposals to changes can only be introduced when a running lease eventually runs out.
The exception is when these changes are specifically stipulated in the lease itself. Or if both parties agrees to the changes in writing.
Except for extraordinary circumstances, landlords have their hands tied if they want their tenants to leave as soon as possible. During the period when the lease is in effect, a landlord cannot request for tenants to move out or attempt to start eviction proceedings.
To be fair to landlords, exceptions for this include:
- failure to pay rental
- violation of key terms in lease agreement
- property in question is used in breaking the law
Which one should you go for?
Although most investors would intuitively feel that long term leases is a better way to rent out, keep in mind that the story is never straight forward.
Long term tenancy can lead to a lesser commitment of time and resources from the landlord.
More than that, tenants who willingly commit to a long term contract would have already thought about the decision long and hard. This makes them more likely to stick around beyond the lease period.
And if someone is going to live in a particular apartment for a while, he/she is more likely to treat the place better instead of abusing it.
The most attractive part of long term leases is the prospect of little to no vacancies.
Short term rental agreements however, could mean more time and money might be needed to freshen up the place due to frequent turnover of tenants. This is without mentioning the extra costs associated with advertising and marketing to reach out to new prospects. Even agents can charge a hefty commission.
However, month-to-month rental agreements allow landlords the flexibility to make changes to the terms of rental with short notice. It also helps you avoid the nightmare of being stuck with a bad tenant.
For example, if there is a sudden uptick of demand and rental in the area, the landlord can implement rental increases as soon as the next window of opportunity arise. Probably in about a month. This is not so with a tenant on a lease.
And if selling the property is already on your mind, a shorter term rental will be more appropriate for your strategy.
With these in mind, do take a hard look at your objective before deciding which way to go. It’s not uncommon to start with a rental agreement and then move on to a lease. In fact, that sounds like a pragmatic way to go about it.