The two most common arrangements between tenants and landlords are rental agreements and leases, and there are advantages to both for real estate owners and investors. While it might seem that the most advantageous arrangement would be a long-term lease that provides certainty for a landlord, this is not always the case, and in certain situations just the opposite can be true. This discussion will define both arrangements, and consider situations where one or the other would be more beneficial to a landlord.
What is a rental agreement?
A rental agreement most often takes the form of a month-to-month contract between renter and landlord, although the duration of the rental period can also be weeks or even days. Upon the expiration of the rental agreement, it could be renewed automatically by mutual consent of the two parties, or the landlord may want to increase the rental price for the next period, or the tenant might even be required to evacuate the premises.
It should be noted that in the event that either party desires to terminate this agreement, a notice of vacation might be required. Rental agreements also need not be formalized, documented arrangements between the two parties, but can be orally agreed to. This is not generally a good idea for either party because there are liability issues involved, and neither side is explicitly protected under some local habitation laws. In addition, anything agreed to verbally is pretty much impossible to prove in court, should a disagreement ever arise over specific issues.
Advantages of a rental agreement
What a rental agreement lacks in certainty for landlord, it makes up for in flexibility. A good example where flexibility might come into play would be when you intend to have renovations done on a particular structure, and the contractor must start by a specific date. The shorter duration of the rental agreement would allow you to free up all necessary units in a building, so the work can be completed as scheduled.
If you are anxious to secure business from students in a college setting, offering shorter duration rental agreements can be one means of attracting that business, because it does not require long-term commitments. Renting out resort properties is also much easier through rental agreements, because you have the flexibility to charge higher rates during seasons of peak demand.
What is a lease agreement?
As most people know, a lease is a kind of contract between renter and landlord which allows for the renter to occupy some kind of dwelling for a stated period of time. Most frequently, that period of time is 12 months, although longer leases are also fairly common.
For the term of the agreement, the landlord provides any necessary maintenance on the dwelling, and the renter agrees to abide by the specific stipulations within the contract, generally referring to requirements that maintain presentable interior and exterior appearance, avoidance of damage, and prompt payment of rental monies.
Advantages of leasing
The biggest advantage of a lease agreement to a landlord is the surety of having a specific dwelling rented out to a tenant, at a guaranteed price for a fixed amount of time, which represents reliable income for the entire period. Legally, a renter cannot unilaterally break the lease agreement, and vacate the premises without notifying the landlord and fulfilling the terms of the lease. In some cases, lease stipulations require that a tenant pay a penalty for breaking the lease, and in other cases a tenant may be required to find a successor tenant prior to leaving.
Which is better?
The answer to which arrangement is better for landlords and their investors really depends on the kind of dwelling being rented, and the plans you might have for such dwellings. For units intended to serve as de facto homes for tenants, a long-term lease with steady income is probably better. Properties used as seasonal dwellings, or properties scheduled for major renovations require the flexibility offered by rental agreements, and landlords should anticipate intermittent income.